Payroll Tax Cut Extended Through 2012

On February 22, President Obama signed the Middle Class Tax Relief and Job Creation Act of 2012. The new law extends through December 2012 a reduction in employment tax rates from 6.2 percent to 4.2 percent for employees and the self-employed. No action is required by workers to continue receiving the payroll tax cut. As before, the lower rate will have no effect on workers’ future Social Security benefits.  The reduction in revenues to the Social Security Trust Fund will be made up by transfers from the General Fund.

Under the law, the employee portion of the FICA tax is 4.2% (traditionally 6.2%) for all of 2012. The employer portion remains at 6.2%. The IRS had instructed employers to implement the reduced rate as soon as possible in 2012, but no later than January 31, 2012. For any employees whose FICA tax was overwithheld in January, the IRS instructs employers to make an offsetting adjustment in the employees’ pay as soon as possible, but no later than March 31, 2012.