On December 23, 2011, Congress approved and President Obama signed a two-month extension of the employee payroll tax cut. The Temporary Payroll Tax Cut Continuation Act of 2011 extends the two percentage point employee payroll tax cut through the end of February 2012.

Unless Congress extends the tax cut, all payroll paid after February 29th will revert back to the full 6.2%. This means that the FICA withholding on the first payroll in March, even though it may represent hours worked in February, will revert back to 6.2%. Employers may want to consider paying any February payroll that would normally be paid in early March, 2012 on or before February 29, 2012 to allow their employees to take advantage of the reduced payroll tax rate. Additionally, business owners that pay themselves salaries as employees may consider maximizing their benefit of the reduced payroll tax rate by reaching the $18,350 wage limit on or before February 29, 2012.

Also, understand that the new law includes a recapture provision, which applies to individuals who receive more than $18,350 in salaries or wages during the two-month extension period. The Social Security wage base for 2012 is $110,100, and $18,350 represents two-months of the full-year amount. The recapture tax would be payable in 2013 and assessed on the individual 1040 when the employee files his or her individual income tax return for the 2012 tax year. The House Ways and Means Committee reported that the recapture provision will only apply if the payroll tax reduction is not extended for the remainder of 2012.

The IRS has instructed employers to implement the reduced payroll tax rate as soon as possible in 2012 but no later than January 31, 2012. For any Social Security tax over-withheld during January, employers should make an offsetting adjustment in employees’ pay as soon as possible but no later than March 31, 2012.

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