2% Income Tax on Excess Jan-Feb. wages

[OtisMozzetti]

IRS has announced that Congress included a 2% "recapture" tax on wages received during Jan. and Feb. 2012 which total more than $18,350 ($110,100 annual rate, in other words). It is to be

an additional INCOME (not Social Security) TAX = (wages during Jan-Feb. - 18350) x 2%.




Yet another "fun" exercise comes down to the Self-Employment Tax computation for those with a Schedule C during Jan. and Feb. 2012?

[Jiggers]

Where did you find this?

[oceanlovin'ea]

IRS Newswire issue Number: IR-2001-124. I got this email yesterday afternoon.
It said the payroll tax cut is temporarily extended in January and February of 2012.

That will just mean that if we do payroll for someone we won't have to change our figures till March.

Linda, EA

[Bees Knees]

When Congress eventually extends the 2% payroll tax reduction for the enitre year, the recapture tax will go away.

[Lion]

Oh My Gosh

Oh my gosh, I just read that Newswire (that's sitting in my mail for me to find some reading time) all the way to the end. What a nightmare. Anything saved in payroll taxes will be made up by the payroll companies charging for all these changes with companies paying their payroll companies instead of raising salaries or making new hires. And, as you say, this 2% doesn't help our ailing SS system. The IRS will "monitor" the situation, not necessarily eliminate the recapture. Once a tax is put in place, it seldom disappears, often increases.

Usually when Congress fiddles with taxes, it keeps us in business (Form 8949) but this time it helps payroll companies.

[Snaggletooth]

Impact on W-2?

So fast forward to NEXT tax season. The IRS (giving them credit for thinking this far ahead) will have an extra line for this Jan/Feb "surtax", either on the 1040 or on some supporting schedule/worksheet. Question is: will the W-2s reflect what has been earned in the Jan/Feb timeframe?

Here comes some dude with a W-2 for $107,000 but he was laid off in October, 2012. Most likely he exceeded the limit in Jan/Feb. But by how much? Is he going to know? No. Will the W-2 tell us?

And of course, Otis has already made reference to this, but self-calculating the profit on a schedule C will be necessary in TWO increments - one for Jan/Feb and another for Mar-Dec. This will REALLY be fun if the Sch C includes Office-in-Home.

Bees has mentioned that this can go away if they extend the payroll tax cut through December. This most certainly would relieve the above-mentioned demarcation by dates, but I'm not sure the surtax itself goes away. Sounds like Congress has found a way to sneak in an extra tax on high earners so they don't benefit from the social security withholding like lower earners.

[taxxcpa]

I think the 2% reduction will be extended through December 2012.
Neither party will want to be blamed for a tax increase until after the November elections.

[Kram BergGold]

No way

I would bet the house the payroll tax reduction will be extended. There is no way we are going to have two different rates in one year.

[JG EA]

I would bet the house the payroll tax reduction will be extended. There is no way we are going to have two different rates in one year.

Good one!!

[Snaggletooth]

Reality Check

I think the 2% reduction will be extended through December 2012.
Neither party will want to be blamed for a tax increase until after the November elections.

This is true, but how long are they going to rob the future and sink the Social Security fund that these same people are already complaining will go broke? We know this battle will be resurrected in Feb of 2012, but what about Dec of 2012, and Dec of 2013, 2014, etc.

I don't really think Congress cares whether we have two rates or not, because history has shown they don't care about what taxpayers have to do to file their taxes. But they will save the tax cut because they don't to be blamed for a typical worker taking home $15/wk less.

If you look at all the myriad tax increases buried in the HealthCare act - Which party is going to belly up to the table and take the blame for that?

[Gary2]

My stock response to such future issues is "It's hard enough keeping up with changes that have already been passed. I ignore whatever changes might happen unless they imply current, important planning decisions."

I'm still trying to understand the political and/or economic reasons for implementing this tax cut on the Social Security side instead of the Making Work Pay or its predecessor approaches.

[Snaggletooth]

Kicking the Can

Gary, I think the idea is that Making Work Pay comes out of current fiscal year money, whereas shortchanging social security collections kicks the can down the street, where future generations and future congressmen have to deal with it.

[Koss]

Cutting Payroll vs. Income Tax

Snaggletooth wrote:

Making Work Pay comes out of current fiscal year money, whereas shortchanging social security collections kicks the can down the street, where future generations and future congressmen have to deal with it.

That sounds good in theory. But the government acknowledged long ago that there is no social security fund. Current social security tax is used to pay current beneficiaries.

There is no "trust fund." That term is used specifically to refer to the trust fund penalty, because in an abstract sense, when an employer withholds taxes from a paycheck, whether they are income taxes or FICA taxes, the employer is holding the money in trust, for the benefit of the employee, or for the benefit of the government, depending on your perspective. The employer is acting as an agent by withholding tax for the employee (or for the IRS), and arguably has a fiduciary duty to promptly tender the money to the IRS. For this reason, failure to do so is treated as a much more serious matter than the employer's failure to pay its own income tax obligations.

When they say that social security will be "broke" by 2040, or whatever the latest projection is, they mean that at that point in time, the amount needed each month to pay benefits will be greater than the amount collected each month in payroll taxes.

There is no reserve. The system is a house of cards. If it were a private sector pension plan, it would have been declared insolvent and taken over by the regulators years ago.

BMK

[Bees Knees]

TTB now has coverage of the new law, along with examples on how the 2% rate reduction works.

http://www.thetaxbook.com/view_update.asp?1=272

Note that employees and self-employed individuals calculate their reductions differently. For example, a self-employed individual could earn all income after the February cut-off date and still get the 2% rate reduction, whereas an employee only gets the rate reduction during January and February.

It will be a real mess if Congress does not extend this through the end of the year.