Social Security Employee Tax Reduction will Last at Least Another Two Months

by Brandon Cook, CPA | Partner, Tax Services Group

The way things are now: Under a tax law passed last year, the usual 6.2 percent OASDI rate for employees was reduced by 2 percent. A comparable tax break is available to self-employed individuals. However, employers aren’t eligible for any reduction. For employers, the 6.2 percent OASDI tax rate continues to apply to amounts up to the wage base. The Medicare rate of 1.45% for employees, and 1.45% for employers continues to apply to all earnings, without a cap.

The amount an employee saved in 2011 depended on the amount of his or her wages. For example, a worker earning $50,000 saved $1,000 (2 percent of $50,000) for the year. Someone earning $100,000 saved $2,000 (2 percent of $100,000). The maximum savings was $2,136 (2 percent of $106,800).

The payroll tax cut reduction was supposed to be in effect for 2011 only. But toward the end of the year, lawmakers began arguing about extending it for another full year. Political bickering ensued about how to finance the tax cut — through a new tax on wealthy Americans or through spending cuts.

On December 23, finally Congress passed a law extending the payroll tax cut through the end of February. The law is aptly named the Temporary Payroll Tax Cut Continuation Act of 2011.

Congress Will Revisit the Issue Soon. Therefore, if the tax holiday is going to last throughout 2012, Congress will have to take up the issue again when they get back to Washington after the holidays. Absent any new legislation, the OASDI tax rate for employees will revert to the 6.2 percent level on March 1, 2012 on wages up to $110,100. This is also the due date for solving the deficit reduction problem.

So be aware that payroll tax withholding could still change in March.

Isn’t It Ironic?

Isn’t it ironic that everyone is concerned about the future bankruptcy of social security, and this is where the tax cut is being applied?