Payroll Tax Cut Bill Includes Recapture Tax

December 23, 2011 ( – The new bill extending the social security payroll tax cut for two months includes a recapture tax for those who make above the taxable wage base prorated for the two-month period.

The Internal Revenue Service said the “recapture” provision applies only to those employees who receive more than $18,350 in wages during the two-month period (the Social Security wage base for 2012 is $110,100, and $18,350 represents two months of the full-year  amount). This provision imposes an additional income tax on these higher-income employees in an amount equal to 2% of the amount of wages they receive during the two-month period in excess of $18,350 (and not greater than $110,100).  

This additional recapture tax is an add-on to income tax liability that the employee would otherwise pay for 2012 and is not subject to reduction by credits or deductions.  The recapture tax would be payable in 2013 when the employee files his or her income tax return for the 2012 tax year. With the possibility of a full-year extension of the payroll tax cut being discussed for 2012, the IRS will closely monitor the situation in case future legislation changes the recapture provision.  

The two month extension of the reduction of social security tax withholding from 6.2% of an employee’s pay to 4.2%, proposed and passed by the U.S. Senate, was passed by the U.S. House of Representatives and signed into law by President Obama on December 23 (see House Passes Two-Month Renewal of Payroll Tax Cut).  

The IRS said employers should implement the new payroll tax rate as soon as possible in 2012 but not later than January 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 IRS will issue additional guidance as needed to implement the provisions of this new two-month extension, including revised employment tax forms and instructions and information for employees who may be subject to the new “recapture” provision.    

For most employers, the quarterly employment tax return for the quarter ending March 31, 2012 is due April 30, 2012.