PAYROLL TAX CUT: THE GOOD, THE BAD & THE UGLY
By Steve Barlotta, CPA
Last week I alerted my followers on LinkedIn and Twitter that a compromise had been reached to extend the Social Security payroll tax cut through the first two months of 2012. This would effectively continue the reduction of the employee’s Social Security tax withholding rate from 6.2 percent to 4.2 percent of wages paid through February 29, 2012. The game plan is for Congress to reconvene in January and finally agree on to how to pay for the tax cut for the rest of 2012.
With most acts passed in Washington, the devil is usually in the details. And this little piece of legislation certainly didn’t disappoint in that area. Included in the extension is a confusing “recapture” provision which applies to employees who receive more than $18,350 in wages during the two month period (the Social Security wage base for 2012 is $110,100, and $18,350 represents two months of the full year amount). The recapture 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). Confused yet? Well, the IRS issued their explanation of the “recapture” provision included in the bill. I won’t bore you with all the tax-geek babble, but after I read their interpretation, I was still baffled.
The first question I posed was who bears the responsibility of reporting this recapture tax and on what form should it be reported? After reading an article from our friends at Accounting Today, the details of this bill became clearer to me. Employers would essentially have no reporting responsibility of the recapture tax. They would be allowed to withhold employee payroll taxes at the reduced rate of 4.2 percent on all wages paid during the two-month period regardless of the new $18,350 cap on wages earned through the end of February (subject only to the full 2012 wage base of $110,000). The employee would be responsible to report the recapture tax as an add-on to their 2012 income taxes. The recapture tax would be payable in 2013 when the employee files their income tax return for the 2012 tax year. And this tax cannot be reduced by credits or deductions.
This seems very complicated to me and has the potential to create many reporting errors for both the employer and employee subjected to the 2% tax on the excess wages. To make this more infuriating, if Congress finally gets its act together and passes the payroll tax reduction extension for all of 2012, this law will be wiped off the books! Once again our elected leaders give little or no thought to the additional time and costs that will be passed onto businesses and individual taxpayers through their careless inefficiencies and dysfunctionality. But, why should we be surprised from a group where logic and good sense seldom prevails?
Source:Michael Cohn, Payroll Tax Cut Extension Includes Recapture Provision, Accounting Today, December 26, 2011
