House and Senate Approve Bill Temporarily Extending the Payroll Tax Cut

Late on December 22nd, House and Senate leaders agreed to end their stalemate over extending the payroll tax break, and have agreed to continue the 2% reduction in workers’ Social Security tax rate through the end of February 2012.

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The payroll extension agreement (bill number H.R. 3765, entitled, the “Temporary Payroll Tax Cut Continuation Act of 2011”) calls for new language to be inserted into the tax relief bill to prevent a potential payroll tax problem for employers.  According to information provided by the House Ways & Means Committee, the revision would allow employers to withhold employee payroll taxes at 4.2% (instead of 6.2%) on all wages paid during the two-month extension period, subject only to the full 2012 wage base ($110,100) and without regard to the $18,350 cap (two-twelfths of the wage base of $110,100) on wages earned through the end of February 2012.   If an employee’s wages during the first two months of 2012 exceed $18,350, and the payroll tax reduction is not extended for the remainder of 2012, an amount equal to 2% of those excess wages would ultimately be recaptured on the worker’s individual 2012 income tax return.  Under the agreement, both Republicans and Democrats in the Senate and House will immediately appoint negotiators to a conference to forge a full-year extension of the payroll tax reduction.

Both the Senate and House approved the bill on the morning of December 23, 2011, and it was signed into law by President Obama shortly thereafter.