What happened again? Payroll tax cut temporarily extended.

In the tax world, "temporary" usually refers to a year or two. However, on December 23, Congress passed, and President Obama signed into law the "Temporary Payroll Tax Cut Continuation Act of 2011." The tax provisions of the TTCA consist of a two-month temporary extension of the payroll tax cut that's in place for 2011, plus a parallel extension of a lower Self-Employment Contributions Act (SECA) tax rate on self-employment income. In a related news release, IRS also provided guidance to employers on how and when to implement the new rate.

Before passage of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, the FICA tax rate for employees and employers was 7.65% each. Under the SECA tax, self-employment income of self-employed taxpayers was subject to a tax of 15.3%. The Social Security portion of the tax is subject to a maximum, the Medicare part is not.

2011 Payroll Tax Cut.  For remuneration received during 2011, the 2010 Tax Relief Act reduced the employee tax rate under the FICA tax by two percentage points from 6.2% to 4.2%. Similarly, for self-employment income for tax years beginning in 2011, the Act reduced the Social Security tax rate by two percentage points to 10.4%. As a result, for 2011, employees pay only 4.2% Social Security tax on wages up to $106,800 and self-employed individuals pay only 10.4% Social Security self-employment taxes on self-employment income up to $106,800. The employer's share was unchanged.

2012 Two Month Extension. Under the TTCA, the reduced rates are extended to apply to covered wages paid only in the first two months of 2012. This is confusing to employers, because wages are reported quarterly. If the rate cut is not further extended, the first quarter of 2012 would have 2 different rates. Also, employers may not be ready to deal with a tax rate which was supposed to expire.

IRS has instructed employers to implement the new payroll tax rate as soon as possible in 2012, but not later than Jan. 31, 2012. If there is 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 Mar. 31, 2012.

Further guidance will be issued by IRS as necessary to implement the provisions of the two-month extension, including the issuance of revised employment tax forms and instructions. For most employers, the quarterly employment tax return for the quarter ending Mar. 31, 2012, is due Apr. 30, 2012.

Congress and the President will be back at it again in January and February to figure out if the temporary cut will be extended again.