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Obama Extends Payroll Tax Holiday Through February

President Obama signed modified legislation (H.R. 3765) on December 23, 2011, extending the Social Security “payroll tax holiday” through the end of February, 2012. The “payroll tax holiday” reduced the employee portion of the Social Security tax by 2 percent from 6.2 percent to 4.2 percent. This means that wages earned in January and February of 2012, up to the Social Security wage base of $110,100, will be taxed at an Old Age, Survivor and Disability Insurance (OASDI) rate of 4.2 percent.

Congress is expected to negotiate a package to extend the tax cut through December 31, 2012, when they reconvene in January. If Congress does not approve an extension of the reduced rate, employees will pay a 4.2 percent OASDI rate for January and February only; the rate for OASDI at which wages will be taxed for the ten remaining months of 2012 will revert to 6.2 percent. A spokesperson for Rep. Dave Camp (R-Mich.) explained: “If an employee’s wages during the first two months of 2012 exceed $18,350 (i.e. two-twelfths of the $110,100 Social Security wage base), an amount equal to 2 percent of those excess wages would ultimately be recaptured on the worker’s individual tax return for 2012.”

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