The Temporary Payroll Tax Cut

Dec 30, 2011 by

Chump-Change

by Henry W. Burke

12.30.11

At the eleventh hour, Congress approved a two-month extension of the employee-side payroll tax cut. On December 23, 2011, Obama signed the Temporary Payroll Tax Cut Continuation Act of 2011. The two-month extension, for January and February 2012, is intended to give lawmakers additional time to negotiate a full-year extension of the payroll tax cut through the end of 2012.

If Congress had not acted, the temporary 2% employee-side payroll tax cut (under the 2010 Tax Relief Act) would have expired at the end of the year (12.31.11). Prior to the temporary tax cut, Social Security tax rates were 6.2% for employees and employers; and 12.4% for self-employed workers. With the reduction in effect for the full 2011 year, Social Security tax rates were 4.2% for employees and employers; and 10.4% for self-employed people.

[6.2% – 2.0% = 4.2%; 12.4% – 2.0% = 10.4%]

The full name for the Social Security tax is OASDI (Old-Age, Survivors, and Disability Insurance) but we will simply use the terms “payroll tax,” “federal payroll tax” or “Social Security” tax here. The payroll tax policy was dubbed a “holiday,” not because it was enacted during Christmas, but because it was supposed to be temporary. Because these taxes apply only to the employee, they are called “employee-side” payroll taxes.

How much money is involved in this temporary payroll tax cut? Let’s look at two examples.

Bob has a Taxable Income of $50,000. For the full 2012 year, he would save $1,000. [$50,000 x 2% cut = $1,000] However, the 2011 Act that Obama signed is only good for two months (January and February 2012) not the full year. This means Bob will save $166.67 (about $167) in the two-month period.

[$50,000 / 12 months = $4,166.67 per month]

[$4,166.67 per month x 2 months = $8,333.33]

and [$8,333.33 x 2% = $166.67]

If Mary has a Taxable Income of $100,000, she would save $2,000 over the full year. [$100,000 x 2% = $2,000] For the two-month period, she would save $333.33 (about $333). [$2,000 / 6 = $333.33]

How did we end up with a two-month extension and not a 12-month extension of the payroll tax cut? This is more difficult to explain and most people don’t care about all of the details.

If Congress and Obama had not acted, the 2% temporary payroll tax cut would have expired on December 31, 2011. Starting January 1, we would be greeted with a 2% tax increase. This was not acceptable.

There was very broad agreement that the payroll tax holiday should be extended through 2012. Obama called for that; the House and Senate wanted that. The majority of Republicans and Democrats supported a full 12-month extension.

You could call this a typical Washington foul-up. Because the Senate waited until the eleventh hour to take up the matter, it could only agree on a two-month extension. All the House had to do was pass a two-month bill but it took the tough road and passed a bill for the full 12 months (the bill requested by Obama).

As Senators were bolting for the airport to start their cherished Christmas vacation, Senate Majority Leader Harry Reid tried to force his bill on the House. Without Senators, you cannot hold a House-Senate Conference.

Obama used his large megaphone to make the Republicans look like they were against a tax cut. Republicans backed down and agreed to the two-month extension. In the end, Obama got what he wanted. He scored an easy victory at the Republicans’ expense.

Henry W. Burke is a Civil Engineer with a B.S.C.E. and M.S.C.E.  He has been a Registered Professional Engineer (P.E.) for 37 years and has worked as a Civil Engineer in construction for over 40 years.  He has written well-researched articles on education, engineering, construction, and the U. S. economy.

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