2012 Payroll Tax Reduction

After weeks of uncertainty, Congress passed the Middle Class Tax Relief and Job Creation Act of 2012, extending the payroll tax cut through the end of 2012.

Congress agreed not to require the $93 billion estimated cost for the payroll tax cut extension to be offset by revenue-raising provisions and to offset costs through the general fund of the Treasury.

Previously, the Temporary Payroll Tax Cut Continuation Act of 2011 (2011 Payroll Continuation Act) extended the employee-side payroll tax rate reduction of 2% through the end of February 2012. However, this new law extends the reduction through the end of 2012.

Individuals who receive wages and salaries will pay Old-Age, Survivors, and Disability Insurance (OASDI) taxes at a rate of 4.2% and self-employed individuals at a reduced 10.4% through the end of 2012. Taxpayers earning more than the Social Security earnings cap of $110,100 benefit from the 2% reduction up to the $110,100 wage base.

The White House estimates that taxpayers, both employees and self-employed, on average will see a $1,000 increase in take-home pay in 2012. This reduced OASDI withholding has no effect on an individual's future Social Security benefits.

Individuals contribute to Social Security through payroll taxes (the Federal Insurance Contributions Act (FICA)) or self-employment taxes (Self-Employment Contributions Act (SECA)). Both FICA and SECA are composed of two parts: (1) the Old-Age, Survivors, and Disability Insurance (OASDI) tax and (2) the Medicare Hospital Insurance (HI) tax. The OASDI tax normally requires employers and employees each to pay 6.2% of wages. Self-employed individuals pay both portions (normally equal to 12.4%). The new law reduces those rates to 4.2% (employees) and 10.4% (self-employed) for 2012. The employer's share of OASDI taxes is not reduced but remains at 6.2% for 2012.

No action is required by workers to continue receiving the payroll tax cut. The IRS released revised Form 941 enabling employers to properly report the newly-extended payroll tax cut.  

Treasury Secretary Timothy Geithner told the Senate Budget Committee that he does not anticipate the payroll tax cut would be extended for a third year (into 2013). "This has to be a temporary tax cut. I don't see any reason to consider supporting its extension." President Obama called for repeal of these timing shifts in his fiscal year (FY) 2013 budget proposals.

PBS will process your payrolls with the updated rates and will keep you updated with future changes.  If you have any questions, please contact your PBS Payroll Specialist.

2012 Payroll Tax Rates
Program Employee Employer Self-Employed
OASDI 4.2% 6.2% 10.4%
HI 1.45% 1.45% 2.90%

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