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Tuesday, February 21, 2012

The Payroll Tax Cut: Is it Here to Stay?

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Congress recently extended the payroll tax cut, so the rate for employees will continue to be 4.2%, down from the usual 6.2%. Unless Congress decides to extend the lower rate again, the 4.2% rate expires December 31, 2012. The employer-side rate of 6.2% continues and was never affected by the previous payroll tax cut legislation. The 10-month extension does not affect the 10.4% SECA rate as that was already in place through 2012.

With the extension, for taxable years beginning in 2012, the income tax deduction allowed for one-half of SECA taxes is determined using 59.6% of the OASDI tax paid on self-employment income up to $110,100, plus one-half of the OASDI tax paid on self-employment income in excess of $110,100, plus one-half of the hospital insurance (HI) portion. Although the legislation that extended the FICA reduction through February 2012 included a recapture provision for excess compensation during January and February 2012, that provision is repealed.

The payroll tax cut allows taxpayers to keep and, it is hoped, spend more of their own income, but it comes at the expense of supporting Social Security, which has already been forecast to experience a shortfall in the future. Looking back to the Making Work Pay tax credit that was in place a few years ago, taxpayers may be getting used to some form of payroll tax relief. What economic and political scenarios may have to occur before the payroll tax credit is allowed to expire, and what would be the timing of such events? Tax cuts are hard to take away. Politically and economically, will there ever be a good time to let the payroll tax revert to its historic level?

--Mark C. Wolf, Tax Law Editor (Compensation Planning)
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