The Payroll Tax Cut program for 2011 and 2012 was not renewed for 2013,and it expired January 1, 2013. Payroll taxes returned to their previous levels on that date.
The Temporary Payroll Tax Cut Continuation Act of 2011, signed in December 2011, continued the 2% cut in Social Security withholding rate for employees through 2012. Originally, this payroll tax cut was part of the Tax Relief Act of 2010
What's the Payroll Tax Cut?
Payroll taxes include federal income tax withholding and FICA taxes (Social Security/Medicare taxes) withheld from employee pay and matched by employers. The payroll tax cut is a 2% decrease in the Social Security tax for employees. Before the cut, employees had to pay 6.2% of their gross pay each payday, as their portion of the Social Security tax, withheld from their pay; the payroll tax cut reduces their withholding rate to 4.2%. There has been no decrease in employer Social Security taxes.
How Does This Payroll Tax Cut Extension Affect My Company?
You should have been adjusting the amount you withhold from employee paychecks to account for this 2% Social Security tax cut. For the first two months of 2012, you should continue this adjustment. This payroll tax cut also affects how you complete Form 941 (quarterly wage and tax report) for 2011.
The IRS guidance on the payroll tax cut states:
Employers should implement the new payroll tax rate as soon as possible in 2012 but not later than Jan. 31, 2012. For any Social Security tax over-withheld during January, employers should make an offsetting adjustment in workers' pay as soon as possible but not later than March 31, 2012.
The law also includes a "recapture" provision for employees who receive more than $18,350 in wages during January and February (the IRS recaptures the money, not employees). Employers must stop taking the 2% payroll tax cut on employee wages above $18,350 during this two month period. In other words, at the point at which an employee's gross pay hits $18,350 before the end of February, you must start withholding Social Security again at the 6.2% rate, until the end of February.
Why this amount? Social Security withholding is capped at a wage level of $110,100 for 2012, so $18,350 represents two months' worth of this maximum. The IRS says it's a way to "equalize" effects of the tax cut.
What happens when the payroll tax cut expires at the end of February?
Starting in March, the Social Security tax for employees will go back to the previous 6.2% rate for the rest of 2012. Of course, if Congress votes to extend the payroll tax cut through the end of 2012, the Social Security tax rate, as well as the "recapture" provision, will probably be changed. But in the meantime, employers must continue the 2% cut for January and February and abide by the recapture provision.
How does the payroll tax cut affect Form 941?
The 2011 version of Form 941 takes into account the 2% payroll tax cut for employees. It's not clear yet how the IRS will handle the 2% cut for just two of the three months (January and February, but not March) in the first quarter of 2012, for the 941 that is due at the end of April 2012.
How does this payroll tax cut affect self-employment taxes?
The Self-employment tax rate cut (for the Social Security portion) was included in the Tax Relief Act. This 2% self-employment tax reduction has also been extended for two months. It's not clear how this will affect self-employment taxes, since these are determined after the end of the year, when the net income for the business is calculated. There's nothing you need to do to get this cut; it's reflected in the calculation of your self-employment taxes on your personal income tax return (on Schedule SE