Congress Gives Businesses a New Payroll Tax Puzzle

Happy New Year! We’re sure you’ve heard about the Christmas gift fromWashingtonwith the extension of the 2011 payroll tax cut into the first two months of 2012, but did our leaders consider what an interesting puzzle they created for employers to implement?

The extension seems to be a basic 4.2% rate on the employee side of the FICA withholding, while the 6.2% rate will be maintained on the employer side. But wait, that only applies until February 29th; after that date, this carriage returns to the pumpkin of a 6.2% rate for both sides. Sounds simple, but let’s look at how these 11th hour rules will be implemented:

The Temporary Payroll Tax Cut Continuation Act of 2011 (you know they spent hours thinking up that clever title) was just signed into law December 23rd. A handful of loyal IRS staffers waived their last- minute shopping opportunity to provide initial guidance on how this extension will work. With such a short window, it’s likely we’ll see our Circular E (Employer’s Tax Guide) booklets a little later in January this year.

Rule 1:  Any incorrect withholding of FICA taxes in January needs to be fixed by the end of the month. If we mistakenly fall back to the old rule of 6.2% after the first of the year (which is what was expected), then we can provide a refund of the taxes in excess of 4.2% any time before the end of March. All employers should be withholding the correct rates by February 1st. Of course, whatever is withheld must be deposited using the EFTPS system according to the standard protocol.

Rule 2: This rule applies to employees who are on track to earn greater than the 2012 FICA limit of $110,100 in 2012. It’d be easy to assume someone earning this higher income could unfairly benefit from the lower interim rate by taking a large salary in the limited, two-month period of FICA reduction using the 4.2% rate, then having the smaller balance for their FICA taxable payroll assessed at the higher rate the rest of the year. To prevent individuals from gaining a discriminatory advantage, Congress provided an alternative approach for us to follow. High-income individuals will benefit from the lower FICA rate on their salaries, but will have to pay a new 2% income tax on the salary that exceeds $18,350 (and is less than $110,100) during that two-month period.

The interim guidance comes with the reassurance that a fun-filled Form 941 will be developed for the first quarter to help us report two months at the 4.2% rate and one month at the 6.2% rate, plus rules for them to recapture any excess benefit that may occur for employees who have FICA wages from more than one employer this year. Employees most likely will not notice any changes if their companies get it right, however.

See, wasn’t that fun? Just wait until they return to discuss extending this opportunity for the rest of the year. In the meantime, if you need a good payroll service, we can help; contact Patrick & Robinson CPAs today at or 904-396-5400.

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