IRS Announces Temporary Extension of FICA Rate Reduction, Including Possible Recapture Tax on 2012 Forms 1040

After much year-end angst, Congress passed the Temporary Payroll Tax Cut Continuation Act of 2011 that extended the lower employee FICA tax rate of 4.2% through February 29, 2012.  Originally the lower rate was scheduled to expire at the end of 2011.  Attempts were made to extend the lower rate for the entire year of 2012, but Congress was unable to arrive at a compromise for the whole year before the Christmas recess, so a two-month extension was passed.

Per IRS News Release 2011-124, employers are encouraged to implement the new rate as soon as possible, but no later than January 31, 2012.  If employees have FICA overwithheld during January, the employer will need to make an offsetting adjustment in pay later in the year (but no later than March 31, 2012).  These provisions recognize that there may not be time for all payroll software to be modified to continue the lower rate in time to meet early 2012 payrolls.

The two-month bill originally passed by the Senate was modified in one form.  The original bill required that employers limit the lower withholding to the first $18,350 (1/6 of the annual FICA limit of $110,000 for 2012), with the rate rising to 6.2% on any wages paid after that point.  Responding to criticism about the costs to businesses of implementing such a cap, the bill removed that requirement.

However, that rule was replaced with a “recapture” provision that will be imposed on the employee.  If an employee receives wages in excess of $18,350 during that two month period, the employee will have imposed an additional tax of 2% of such excess wages.  That recapture tax would be paid with the employee’s 2012 Form 1040.

Apparently there was some concern that some individuals might otherwise accelerate the receipt of wages for 2012 so that all FICA would be paid prior to the end of February.  Such individuals might have received a “windfall” should Congress be unable to come to an agreement on extending this benefit for the full year.

Presumably if Congress does come back after the recess and enact a full year extension of the lower rate, this “recapture” provision will disappear.

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