Insights

On February 22, the President signed into law H.R. 3630, the “Middle Class Tax Relief and Job Creation Act of 2012” (Act). It extends the 2 percent payroll tax cut through the end of 2012 and also repeals a number of estimated tax shifts for large corporations.

Payroll Tax Cut Extended Through End of 2012

Background – The Federal Insurance Contributions Act (FICA) imposes two taxes on employers, employees, and self-employed workers: one for Old Age, Survivors, and Disability Insurance (OASDI), commonly known as the Social Security tax; and the other for Hospital Insurance (HI), commonly known as the Medicare tax. The rates are as follows:

• • • 7.65 percent for employees and employers
      (6.2 percent OASDI and 1.45 percent HI)
    • 15.3 percent for self-employed taxpayers
      (12.4 percent OASDI and 2.9 percent HI)

Temporary tax cut for 2011 – For remuneration received during 2011, the “payroll tax holiday period,” the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Relief Act) reduced the employee OASDI tax rate by 2 percent to:

• • • 4.2 percent for employees only
    • 10.4 percent for self-employed taxpayers

Temporary tax cut for 2012 – Under the “Temporary Payroll Tax Cut Continuation Act of 2011” (TTCA), the 2 percent OASDI tax rate reduction was extended to apply to covered earnings paid in the first two months of 2012 to employees and self-employed taxpayers.

The TTCA also provided for a recapture of any benefit a taxpayer may have received from the reduction in the OASDI tax rate for remuneration received during the first two months of 2012 in excess of $18,350 or for self-employment income up to $18,350.

New law – The Act provides that the “payroll tax holiday period” means calendar years 2011 and 2012.  Thus, the 2 percent payroll tax reduction for employees and self-employed taxpayers will apply through December 31, 2012.

As a result, for 2012, employees will pay only 4.2 percent Social Security tax on wages up to $110,100 (wage base for 2012) and self-employed individuals will pay only 10.4 percent Social Security self-employment taxes on self-employment income up to $110,100.  In addition, the recapture provisions have been eliminated.

Many Accelerations in Estimated Tax Payments for Large Corporations Are Repealed

Generally, corporations must pay estimated income tax for each tax year in 4 equal installments due on the 15th day of the 4th, 6th, 9th, and 12th month of the tax year. In the past, however, Congress has on many occasions modified the estimated tax payment schedule for large corporations (those with assets of at least $1 billion, determined as of the end of the preceding tax year). Typically, these provisions boosted large corporations’ estimated tax payments due in the fourth quarter of particular years by a certain percentage, while decreasing their payments by a corresponding amount in the first quarter of the following years. The timing shifts permitted Congress to satisfy certain budgetary requirements.

New law – Large corporations will be required to make estimated tax payments in 2012, 2014, 2015, 2016, and 2019, as if the prior legislation shifting the estimated tax payments had never been enacted or amended.

If you would like to discuss the impact of this new legislation on you or your business, please contact the expert listed below at PYA, (800) 270-9629.

WE ARE REQUIRED BY IRS CIRCULAR 230 TO INFORM YOU THAT THE FOLLOWING DISCUSSION WAS NOT INTENDED OR WRITTEN TO BE USED, AND IT CANNOT BE USED, NOR RELIED UPON, BY ANY TAXPAYER FOR THE PURPOSE OF AVOIDING ANY PENALTIES THAT MAY BE IMPOSED UNDER FEDERAL TAX LAW.  THE ADVICE WAS WRITTEN TO SUPPORT THE PROMOTION OR MARKETING OF THE TRANSACTIONS OR MATTERS ADDRESSED IN THE DISCUSSION.  EACH TAXPAYER SHOULD SEEK ADVICE BASED ON ITS PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR.