Wednesday, February 22, 2012

Social Security Tax Rate to Remain at 4.2% for All of 2012


Congress has voted in favor of extending for the entire year of 2012 the temporary reduction in the employee's portion of the Social Security tax. Currently, employees pay 4.2% of their wages in Social Security taxes, a rate that has been in effect since January 2011 and was scheduled to expire at the end of February 2012. HR 3630, the Middle Class Tax Relief and Job Creation Act of 2012, extends this 4.2% rate through the end of 2012. The House voted in favor of HR 3630 by 293 to 132; the Senate approved the legislation by a vote of 60 to 36. President Obama has not yet signed the bill into law.


Employers still pay the normal rate of 6.2% of wages into the Social Security program. For 2012, Social Security taxes are assessed on wages up to the annual wage base limit of $110,100.

Self-employed persons will pay a combined 10.4% in Social Security taxes, instead of the normal 12.4%, reflecting both the employer's and the employee's share of Social Security taxes.

This payroll tax holiday does not change Medicare taxes, which are assessed on all wage and self-employment income at a rate of 2.9%, with half paid by the employee and half paid by the employer.

The payroll tax holiday began has a one-year rate reduction for the employee-portion of Social Security taxes in 2011 (HR 4853, the Tax Relief Act). This was then extended for two months through the end of February 2012 (HR 3765). It has now been extended through the end of 2012 (HR 3630).

To prevent Social Security from losing tax revenue, Congress mandated that revenues be transferred from the general fund to the Social Security trust funds to make up for the tax reduction.

The rate reduction also applies to employees covered by the Railroad Retirement System.

The previous, two-month extension of the payroll tax holiday passed in December 2011 (HR 3765) contained a pay-back provision designed to prevent higher-income persons from timing the receipt of salary in January and February in order to obtain a reduction in Social Security tax. That recapture tax has been repealed by HR 3630 since the Social Security rate reduction applies to the whole year of 2012.

Prior to the payroll tax holidays of 2011 and 2012, the last time America saw a 4.2% rate for Social Security coverage was the years 1969 and 1970. (Source: SSA.gov.)

Tax planning tips for the payroll tax holiday

This is now the second, and perhaps final, year for the temporary reduction in the rate of tax paid for Social Security coverage. 2012 is also the last year (under current law) for the reduced tax rates on income. Thus 2013 may witness a double increase in taxation from the expiration of the Bush-era tax cuts and the expiration of the temporary reduction in Social Security taxes.

Wage earners may want to consider negotiating for bonuses to be paid out in 2012 so as to take advantage of the lower Social Security tax rate. Similarly, self-employed persons may want to accelerate income into 2012 by increasing revenues or deferring deductions. Deductions can be deferred, for example, by depreciating property over its normal depreciation schedule rather than expensing the entire amount through Section 179.

Accelerating income in this fashion can create a permanent tax reduction if the wages or self-employed income are over the $110,100 Social Security wage base, since any earnings over that limit are not subject to Social Security taxes.

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