Paul L. Caron

Friday, December 23, 2011

IRS to Implement New 2% 'Recapture Tax' in Two-Month Payroll Tax Cut Extension

IRS LogoPayroll Tax Cut Temporarily Extended into 2012 (IR-2011-124):

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% 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.

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» Congress kicks the can for two more months from Roth & Company, P.C.
The two-month extension of the employee 2-percent cut in the employee Social Security tax rate is now law. (H.R. 3765).... [Read More]

Tracked on Dec 26, 2011 8:40:22 AM


Rick, Congress probably just regards your programming effort as yet another make-work "stimulus" project!

Posted by: AMTbuff | Dec 27, 2011 9:37:11 AM

It's amazing what lengths Obama had to go to in order to win this extension. Seemingly the opposition is in favor of the extension. But he had to find 20 small business owners on Twitter and march them onto Capitol Hill to prove his point? Congress continues to squeeze down on entrepreneurs, not knowing they are harming the nation's most vital class. We gathered the original Obama speech and Bloomberg, post- bill analysis on our site (original vids.) With your permission, I'd like to post the link here. How is it possible he had to go this far to get this bill passed?

Posted by: Motorator | Dec 27, 2011 6:49:29 AM

Andy, it's clear you don't understand how the relevant provisions work. To borrow the old saying, it's better to be silent and thought a fool than to speak out and remove all doubt.

Posted by: TAXLWYR | Dec 24, 2011 7:44:46 PM

AMTbuff, maybe the recapture provision will never happen, but it still has to be programmed, tested, and implemented for every computerized Payroll system. Congress never seems to care about the impact of their kicking the can down the road on the rest of us.

Posted by: Rick Caird | Dec 24, 2011 1:26:59 PM

Varones has it right. The vitriol is misplaced. This provision is only a technicality. The recapture tax will never happen.

Posted by: AMTbuff | Dec 24, 2011 12:11:06 PM

The assumption is that the recapture will disappear? I don't assume that, at all. What I do assume, is that if the payroll tax holiday is extended throughout the year, the 2% recapture will apply to all income over $110,100 for the year, "to help pay for it." I hope that's wrong, however. I'm approximately half again over that income cap, so I see it as in effect a 1% hike in my income tax since "I make too much" and "I need to pay my fair share." Which is ridiculous.

I also don't think it's paranoia to worry that the cap will entirely disappear, either. I see that as exceedingly likely over the next couple decades as an attempt to "save Social Security," and I also see that people like me will eventually be means-tested out of it, so I will have paid all this money and in the end have it just stolen from me.

Posted by: Andy | Dec 24, 2011 11:48:01 AM

jms, you misunderstand the nature of the tax. It's not intended to raise revenue. Instead, the tax operates to ensure that the 4.2% social security tax rate only applies to the first $18,350 in wage income (that is, 2/12 of the $110,100 wage income cap). It would a complete waste for an employee to do as you suggest - yes, the person would avoid the 2% add-on tax, but the person would also not get the 4.2% social security tax rate on that income in the first place. The add-on tax washes out the excess benefit.

Posted by: TAXLWYR | Dec 24, 2011 11:13:19 AM

Yes, the rich now is anyone who earns more than $110 K. Did you guys really believed the millionaires, etc story???

Posted by: Jose G Pol | Dec 24, 2011 9:40:38 AM

W.C. Varones, you are absolutely correct - the provision is there to ensure no disproportionate benefits, and the assumption is that the recapture will disappear if the reduced rate is extended for the full year.

Bill Wiltsch, you need to work on your reading comprehension. It's incredibly clear that the provisions aren't a backdoor way to end the income cap on social security taxes. Also, your paranoia is amusing.

Posted by: TaxGuy | Dec 24, 2011 9:27:54 AM

Sounds like an easy tax to avoid. Have your employer reduce your salary to $9000 per month for two months, then give you a bonus in March to make up the difference. I predict that this provision will raise approximately $0 in revenue while having negative unpredicted consequences. Or does the law somehow preclude that?

Posted by: jms | Dec 24, 2011 8:57:57 AM

Own your own business? SCREEEEEEEWWWW YOUUUUUU.

Posted by: DensityDuck | Dec 24, 2011 8:33:28 AM

Does this mean that "rich" is getting defined down to anyone who makes $110 K?

Posted by: Patrick Blake | Dec 24, 2011 6:15:09 AM

And what is the true meaning of paragraph five - that it is to be treated like income tax but not like income tax since you cannot have deductions (like the SS tax). It seems that the wording has some hidden meanings that a tax law prof might be able to simplify.

Posted by: Bill Wiltsch | Dec 24, 2011 6:12:31 AM

Do I have this straight? The SS tax has a cap of $110K so that we are supposed to be taxed 6.2% up to $110K, but with the "holiday" this tax is now 4.2%. But, they have now instituted a 2% tax on all wages over $110K? So, this is a back door way of instituting SS "reform" of the democratic flavor that is to remove the SS cap? And what are the chances this will get removed once they reverse the "holiday"?

Posted by: Bill Wiltsch | Dec 24, 2011 6:00:14 AM

Every time the Congress makes a law its a joke and every time the Congress makes a joke its a law.

No man's life, liberty or property are secure so long as the legislature is in session.

Posted by: John | Dec 24, 2011 5:10:42 AM

Arguably, this provision is only there to keep high earners from benefiting disproportionately in the event the tax cut doesn't get extended (because high earners hit the tax cap early in the year and could thus get a full year's worth of tax cuts in the two months).

Presumably the tax cut gets extended for a full year and then the recapture goes away.

Posted by: W.C. Varones | Dec 24, 2011 4:53:31 AM

Everybody has to keep track of when in the year their income is earned even if they don't owe anything.

Pointless work is the point.

Posted by: rhhardin | Dec 24, 2011 4:32:53 AM

I stand in awe of the complexities of our irrational leaders. I can't figure out why they haven't added a retroactive tax that is a quadratic containing a variable that is the cube of the quantities of Chevy Volts produced divided by the ratio of the $US : Euro. Of course that would require a forward projection of the quantity of bond sale failures in both regions.

Posted by: egoist | Dec 24, 2011 4:16:27 AM