In our January 2011 Newsletter, we wrote an article called The 2% Solution about the one-year 2% reduction in Social Security Taxes.?? This tax break was recently extended into the first two months of 2012. According to our friends at the IRS:

Nearly 160? million workers will benefit from the extension of the reduced payroll tax rate? that has been in effect for 2011. The Temporary Payroll Tax Cut Continuation Act? of 2011 temporarily extends the two percentage point payroll tax cut for? employees, continuing the reduction of their Social Security tax withholding? rate from 6.2 percent to 4.2 percent of wages paid through Feb. 29, 2012. This? reduced Social Security withholding will have no effect on employees? future? Social Security benefits.

Employers? should implement the new payroll tax rate as soon as possible in 2012 but not? later than Jan. 31, 2012. For 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 March 31, 2012.

Employers and? payroll companies will handle the withholding changes, so workers should not? need to take any additional action.

Under the terms? negotiated by Congress, the law also includes a new ?recapture? provision, which? applies only to those employees who receive more than $18,350 in wages during? the two-month period (the Social Security wage base for 2012 is $110,100, and? $18,350 represents two months of the full-year amount). This provision imposes? an additional income tax on these higher-income employees in an amount equal to? 2 percent of the amount of wages they receive during the two-month period in? excess of $18,350 (and not greater than $110,100).???

This additional? recapture tax is an add-on to income tax liability that the employee would? otherwise pay for 2012 and is not subject to reduction by credits or? deductions. The recapture tax would be payable in 2013 when the employee files? his or her income tax return for the 2012 tax year. With the possibility of a? full-year extension of the payroll tax cut being discussed for 2012, the IRS? will closely monitor the situation in case future legislation changes the? recapture provision.

The IRS will? issue additional guidance as needed to implement the provisions of this new? two-month extension, including revised employment tax forms and instructions and? information for employees who may be subject to the new ?recapture? provision. For most employers, the quarterly employment tax return for the? quarter ending March 31, 2012, is due April 30, 2012.