“Payroll Tax Cut” Extension Bill Clears the Congress

February 21, 2012 | Roger McEowen


Overview of Extension Provision

On February 17, the U.S. House and Senate approved H.R. 3630, the “Middle Class Tax Relief and Job Creation Act of 2012.”  The vote on the legislation was partisan, particularly on the Senate side – with 90 percent of Democratic Senators voting for the bill and 68 percent of Republican Senators voting against the bill.  On the House side, 78 percent of Democratic members voted for the bill, and 62 percent of Republicans supported it.  The President is expected to sign the bill into law. 

The bill, among other things, extends through 2012 the two-percentage point reduction in the payroll tax (from 6.2 percent to 4.2 percent for the OASDI portion of the FICA tax).  For self-employed persons, the reduction is from 12.4 percent to 10.4 percent.  Prior law extending the reduction, the “Temporary Payroll Tax Cut Continuation Act of 2011 (P.L. 112-78), was set to expire at the end of February.  That law also contained a recapture provision equal to 2 percent applicable to remuneration received in excess of $18,350 from January 1, 2012, through February 29, 2012.  But, the bill repeals the recapture provision.  The OASDI wage base for 2012 is $110,100, so the two percentage point reduction reduces the maximum tax liability by $2,202(or $42.35/week for someone earning $110,100 for 2012; $19.23/week for the typical “middle class” taxpayer).  Self-employed persons will still be allowed to deduct the full amount of the employer portion of SECA taxes pursuant to I.R.C. §164(f) due to a recomputed percentage formula.  However, in 2012, the two percentage point reduction is ignored in making the determination of a taxpayer’s net earnings from self-employment.  Instead, that deduction remains fixes at 7.65 percent of self-employment income.

The Congressional Budget Office has estimated that the Act will increase the federal deficit by $89 billion over the next ten years.  There were no offsetting revenue increases in the Act, but revenues are to be transferred from the General Fund to cover the reduction in Social Security revenues. 

Other Provisions      

The bill also repeals the recently enacted changes in estimated tax payments for large corporations.  We covered all of these changes at the tax schools last fall.  That information is now irrelevant.

The bill extends unemployment benefits to up to 73 weeks in states with unemployment rates exceeding 8.3 percent.  Other states can extend benefits from between 40 and 63 weeks.  Section 2304 of the bill contains a provision specifying that welfare recipients cannot use their welfare benefits in strip clubs.

The bill also bars Medicare reimbursements to medical professionals from being reduced, and directs the President to approve a permit for the Keystone XL Pipeline unless the President determines that the pipeline would not serve the national interest.  If the President makes such a determination, a report must be made within 60 days of enactment of the Act to appropriate congressional committees.

Not Included

The bill does not contain any restoration of expense method depreciation at the 2011 level of $500,000 or first-year “bonus” depreciation at 100 percent.