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17 February 2011


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Payroll Tax Cut for Employees But No Relief for Employers

The House and Senate approved the extension of the payroll (Social Security) tax cut.  The last extension ended in December 2011.  The extension will now last until December 2012.  The Social Security Tax cut was first reduced under the Unemployment Insurance and Reauthorization and Job Creation Act of 2010.  It will now go to the President for his signature.

The payroll tax cut being extended is the Social Security contributions that employees make to the Social Security Fund.  Before the reduction the rate was set at 6.2% of an employee’s taxable income.  The reduction was from 6.2% to 4.2%.  Thus, saving the employee 2%.

However, there is no relief for the employer who is still required to pay his 6.2%.  Both employee and employer are required to pay Social Security Taxes.  Before the reduction, the employee would normally pay 6.2% and the employer would pay the other 6.2%.  With the reduction the employee will only pay 4.2%.  The employer will continue to pay 6.2%.

Social Security taxes are paid based on a wage base.  In 2011 the wage base was $106,800.  For 2012 the wage base was raised to $110,100.  Hence, increasing the total amount that have to be paid in taxes.

If you’re self-employed you get the 2% employee reduction.  Self-employed individuals have to pay both the employee and employer portion of Social Security taxes.  Hence the effective Social Security tax for 2012 for the self-employed is 10.4%.

The reduced tax rate for earnings in 2012 applies only to the first $18,350 of a worker’s total wages and self-employment income. The limit of $18,350 is two-twelfths of the $110,100 taxable earnings limit for 2012.  Hence, this is not as big a tax relief as you may think.

The Library of Congress Thomas
Social Security Administration

Unemployment Insurance and Reauthorization and Job Creation Act of 2010

by Tim Miller



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