So now that the payroll tax cut has been extended for two months, what does that mean for taxpayers?
Well, even though the collective wisdom is that Congress will hammer out a longer term deal, the IRS gets to play a game of “let’s put a bunch of provisions in place within the space of a few days only to turn around and undo it in a few weeks.” Sure enough, the IRS released Newswire Issue IR-2011-124 today advising that the cuts have been extended on wages paid through February 29, 2012.
The IRS further advised that:
Employers should implement the new payroll tax rate as soon as possible in 2012 but not later than Jan. 31, 2012. For any Social Security tax over-withheld during January, employers should make an offsetting adjustment in workers’ pay as soon as possible but not later than March 31, 2012.
Employers and payroll companies will handle the withholding changes, so workers should not need to take any additional action.
More importantly, the IRS has advised – since Congress didn’t give this much play at all – that the law includes a new “recapture” provision for employees who will be paid more than $18,350 in wages during those first two months. The Social Security cap for 2012 is $110,100 so that Social Security taxes are not imposed on wages over that amount; there is no corresponding cap for Medicare. If you average the cap out over the year, $18,350 would be the equivalent of two months’ pay.
With me so far?
Under the new law, an additional income tax will be imposed on those taxpayers who receive more than $18,350 in wages during that two month period. The tax is an amount equal to 2% of the amount of wages received during the two-month period in excess of $18,350 (and not greater than $110,100).
The IRS notes that the “recapture” tax is an add-on to income tax liability in 2012 and is not subject to reduction by credits or deductions. The extra tax is payable in 2013 when the taxpayer files his or her federal income tax return.
And those new tax forms I said we’d need? They’re coming, too.
The crazy part of all of this is that the IRS will scramble to get all of this in place for… what? It’s all subject to change depending on which way the wind blows or what kind of mood Congress is in. Costly and inefficient. Thanks, Congress.
With all of this in mind, the IRS also advised that it will issue additional guidance as needed.
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