Payroll Tax Cut Temporarily Extended: 5 Important Facts You Need To Know

The December 23 payroll tax cut extension has been buzzing in the media for months. But have you ever actually thought about how the tax cut actually applies to you? To figure this out, while avoiding having to sort through the legislative language, read the following top five take-a-ways.

The extension is not permanent

Workers will get two more months of a rate reduction in their Social Security taxes. However, this extension is temporary. As of now, the reduced tax rate of 4.2% only applies until February 29 when the tax rate is set to return to 6.2%. Although there is a likelihood of Congress extending it through 2012, nothing is certain until President Obama signs the bill.

The extended tax cut covers the self employed

The extension also applies the Social Security tax rate reduction to the self-employment taxes. This deduction has not changed, which allows self employed individuals to deduct their employer portion of the tax as an adjustment to their gross income.

The rate reduction is automatic for employees

As an employee, you do not have to do anything different to benefit from the tax decrease. If you are eligible, employers will apply the rate reduction when figuring out your withholding for Social Security Tax. Employers must make this adjustment no later than January 31, 2012.

Your Social Security benefits will not suffer

Although you are paying less to the Social Security system, you are not suffering from by collecting less benefits. The government is paying the difference.

The tax cut only applies up to certain incomes

If you earn more than $110,000 a year, the wage base limit,  you will be subject to a new recapture rule upon filing your 2012 tax return. The reduction applies to your earnings up to $110,000 but you will be taxed the original 6.2% for all excess earnings. Again, this is only effective until February 29, 2012.


If Congress extends the same payroll tax cut in February through 2012, these same rules will apply. Check our blog often for more tax cut updates.

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