What Happens to Social Security Payroll Tax in March?

Dan Schindler, Tax Associate

On December 23, 2011 Congress passed a two-month Social Security payroll tax cut extending through February 2012 using the 2011 tax rates.  However, as March rolls around, taxpayers earning a salary will see a slight reduction in their paychecks even if their salary remains the same.  As of now, the Social Security tax rate for the remainder of 2012 will increase to 6.2% for employees as opposed to 4.2%.  Self-employed individuals will incur a Social Security tax rate of 12.4% instead of 10.4%.  Additionally, the wages subject to Social Security tax is increasing from $106,800 to $110,100, marking the first increase since 2009. 

Under the terms negotiated by Congress, this extension includes a new 2% ‘recapture’ provision, which applies only to those employees who receive more than $18,350 (which is the prorated portion of the $110,100) in wages during the two-month period.  However, this provision will only apply if the payroll tax reduction is not extended for the remainder of 2012.  And if you make more than $110,100, don’t forget any excess is free from Social Security taxes. 

As for self-employed individuals, estimated tax payments may need to increase for 2012 to account for the increase in self-employment tax.  Consult with your personal accountant to make proper estimated payments to avoid a surprise tax penalty at the end of the year. 

AMD will pay close attention to keep individuals aware of future legislation changes.