The HR Specialist

2012 FICA wage base, employee tax rate

Employee Social Security rate extended through December 2012

 Update: Feb. 21, 2012

With almost two full weeks to spare, Congress on Feb. 17 approved legislation extending the so-called payroll tax holiday through the end of 2012.

That means the employee Social Security tax rate will remain at 4.2% for the rest of the year, and won’t revert to the usual 6.2% rate until after this fall’s elections. President Obama is expected to sign the bill this week.

If Congress hadn’t acted, the old rate would have kicked in again on March 1. The House and Senate ended 2011 with a bitter, partisan fight over extending the 4.2% rate, avoiding a stalemate only by passing a stop-gap measure that covered just the first two months of this year.

In addition to extending the 4.2% employee Social Security rate, the Middle Class Tax Relief and Job Creation Act of 2012 (H.R. 3630) repealed a provision in the December legislation that capped at $18,350 the amount of compensation that was eligible for the 4.2% rate so that high earners couldn’t front load their pay into the first two months of the year.

The law also contains provisions that allow states to avoid high unemployment rates by establishing voluntary work-sharing plans.

 

4.2% employee Social Security rate extended through February 2012

Update: Dec. 23, 2011

On Dec. 23, Congress voted to extend the 4.2% employee Social Security tax rate through Feb. 29, 2012. President Obama immediately signed the bill—H.R. 3765—preventing the employee rate from reverting to 6.2% on Jan. 1, 2012.

Negotiations between the House and Senate to keep the tax rate at 4.2% for the remainder of 2012 will open in early January.

Catch: The bill attempts to prevent high earners from maxing out on their Social Security taxes by Feb. 29. Employees who earn more than $18,350 by the end of February will pay an additional 2% income tax. (An earlier version of the tax extension had the Social Security rate reverting to 6.2% if wages exceeded $18,350 during January and February).

The IRS has clarified that the tax isn’t subject to credits or deductions, and will be collected when employees file their 2012 1040s.

FICA wage base increases to $110,100 for 2012

The Social Security Administration has announced that the taxable wage base for the Social Security portion of FICA will increase to $110,100 in 2012. That’s a 3.1% hike over the 2011 wage base of $106,800.

Of the estimated 161 million workers who will pay Social Security taxes in 2012, about 10 million will pay higher taxes as a result of the increase in the taxable maximum.

Except for pretax medical and tax-free fringe benefits, all wages are subject to the 1.45% Medicare portion of FICA, since no wage base applies to Medicare. (SSA Fact Sheet, 10-19-11

2012 Social Security tax rates up in the air

The one-year decrease in the employee Social Security tax rate—to 4.2%, from 6.2%—is scheduled to expire at the end of this year.

However, President Obama’s proposed American Jobs Act of 2011 would lower the employee Social Security tax rate further, to 3.1%, for 2012.

The Senate recently voted down the legislation, so it’s not possible to predict what will happen. The Senate Democratic leadership now plans to reintroduce parts of the proposal for consideration on a piece-by-piece basis.

The jobs act would lower the employer Social Security tax rate to 3.1% on the first $5 million in wages paid, and would provide a 6.2% payroll tax credit, worth up to $50 million, for employers that increase wages over wages paid during the previous year. Who would be excluded: Federal, state and local government employers would be excluded from this proposal, but public educational institutions would be covered.

Conventional wisdom says that some form of the Social Security tax reduction will eventually pass. We’ll report on any developments as they happen.

Exempt amounts for retirees

Retirees who want to return to work are a reliable resource, since they already know the ropes. However, those who rejoin the workforce could lose some of their Social Security benefits. How much they’ll lose depends on an earnings test.

Retirees who return to work during the year they reach full retirement age—between 65 and 67, depending on when they were born—are subject to a modified earnings test that applies only to earnings for the months before that birthday. Wages earned after that birthday don’t reduce Social Security benefits. The exempt amount is $38,880 a year; $3,240 a month. For them, $1 in benefits is lost for every $3 they earn.

A separate earnings test applies to early retirees. Employees who retire before they reach full retirement age and who then return to work can continue to earn up to $14,640 a year ($1,220 a month) without losing benefits. For those retirees, $1 in benefits is lost for every $2 they earn.

Tip: Retirees usually think they’ll lose more benefits than they actually will, so informing them of the 2012 figures can ease their minds.

2012 pension COLAs pending

The IRS has yet to release the 2012 cost of living adjustments for pretax contributions into 401(k) plans, pretax catch-up contributions and other inflation-adjusted pension amounts. We will report those figures as soon as the IRS releases them.

For more information, please visit: Summary of The Middle Class Tax Relief and Job Creation Act of 2012

Employee Social Security rate extended through December 2012

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