Under the Middle Class Tax Relief and Job Creation Act of 2012, enacted on Wednesday, workers will continue to pay a lower social security tax withholding rate of 4.2%, which is two percentage points less than the 6.2% rate in effect prior to 2011. This reduced rate, originally in effect for all of 2011, was extended through the end of February by the Temporary Payroll Tax Cut Continuation Act of 2011 (see Senate and House Agree on Payroll Tax Cut for 2012).
According to the IRS, as before, the lower rate will have no effect on workers’ future Social Security benefits. The reduction in revenues to the Social Security Trust Fund will be made up by transfers from the General Fund.
Self-employed individuals will also benefit from a comparable rate reduction in the social security portion of the self-employment tax from 12.4% to 10.4%. For 2012, the social security tax applies to the first $110,100 of wages and net self-employment income received by an individual.
The new law also repeals the 2% recapture tax included in the December legislation that effectively capped at $18,350 the amount of wages eligible for the payroll tax cut. As a result, the now repealed recapture tax does not apply (see Payroll Tax Cut Bill Includes Recapture Tax).
The IRS said it will issue additional guidance, as needed, to implement the newly-extended payroll tax cut, and any further updates will be posted on IRS.gov.The revised Form 941 is available at http://www.irs.gov/pub/irs-pdf/f941.pdf.