OBAMA ADMINISTRATION PROPOSES EXTENSION OF PAY ROLL TAX DEDUCTION

The following excerpt is from the U.S. Department of Treasury website: TEMPORARY TAX RELIEF TO CREATE JOBS AND JUMPSTART GROWTH EXTEND TEMPORARY REDUCTION IN THE SOCIAL SECURITY PAYROLL TAX RATE FOR EMPLOYEES AND SELF-EMPLOYED INDIVIDUALS Current Law Most wages and salaries are subject to Social Security and Medicare taxes under the Federal Insurance Contributions Act (FICA). Earnings from self-employment are subject to Social Security and Medicare taxes under the Self Employment Contributions Act (SECA). The FICA tax is imposed to fund two different benefit programs: (1) the old-age, survivor and disability insurance program (“OASDI”), which funds the Social Security program that provides monthly retirement, disability, and survivor benefits; and (2) Medicare hospital insurance (“HI”). Generally, the OASDI tax rate of 12.4 percent applies to taxable wages and salaries up to the OASDI wage base ($106,800 for 2011 and $110,100 for 2012), and the HI tax of 2.9 percent applies to all taxable wages and salaries. Generally, one-half of both OASDI and HI taxes are paid by the employer and the other half are paid by the employee through mandatory withholding. Earnings from self-employment are also subject to Social Security and Medicare taxes at the same total tax rates, and one-half of the amount of SECA tax (that is, the amount equivalent to the employer portion of FICA) is deductible for income tax purposes. For the first $106,800 of taxable wages and salaries received during 2011 and essentially the first $18,350 of taxable wages and salaries received during the first two months of 2012, the Social Security tax on employees was reduced by 2.0 percentage points, from 6.2 percent to 4.2 percent, and the Social Security tax on the self-employed was similarly reduced from 12.4 percent to 10.4 percent. The Social Security Trust Fund was held harmless and received transfers from the General Fund equal to the reduction in payroll taxes attributable to these reductions in the payroll tax rate. Reasons for Change The temporary reduction in Social Security tax provides relatively large benefits to workers who have been hardest hit by the recession and are most likely to spend their tax cut, stimulating the economy and creating jobs. Payroll tax cuts are particularly effective because they are delivered immediately in the worker’s paycheck, regardless of whether the worker has a current income tax liability. Extending this reduction in payroll taxes would provide continued financial assistance to middleclass families and encourage additional job creation.2 Proposal The Administration proposes to extend the 2.0 percentage point reduction in the Social Security tax on employees to the first $110,100 of taxable wages and salaries received during 2012. Similarly, the Administration proposes to extend the 2.0 percentage point reduction in the Social Security tax on the self-employed to the first $110,100 of taxable self-employment earnings received during 2012. The Social Security Trust Fund will be held harmless and receive transfers from the General Fund equal to the reduction in payroll taxes attributable to these reductions in the payroll tax rate. The proposal would be effective upon the date of enactment