Potential Extra Tax Preparer Work Embodied in New Payroll Tax Cut
After much debate, Congress finally agreed to an extension of the reduced payroll tax rate that was effective during all of 2011. The new law only temporarily extends the rate cut of two percent on Social Security withholding from employee paychecks. It also causes extra tax preparer work for the future returns of some individuals.
The withholding rate for Social Security tax continues at 4.2 percent through February 29, 2012. After that date, the rate returns to the normal 6.2 percent unless further congressional action is taken. The same reduced rate applies to the self-employment tax. Therefore, tax preparation services dealing with business proprietors are affected.
The most demanding impact is tax preparer 2013 duties for high wage earners. Congress mandated a “recapture” provision for employees receiving wages of more than $18,350 during the first two months of 2012. This recapture tax is added to the income tax liability of affected workers on a 2012 tax return filed in 2013.
A tax preparer continuing education course on updated tax law will provide the details pertaining to the recapture. It adds to an employee’s normal income tax calculation. No reduction by tax credits is permitted. This additional tax is imposed upon individuals with income in excess of the Social Security wage base. Because that ceiling is $110,100 for the entire year of 2012, a total of $18,350 is two months of the annual amount.
The recapture tax is two percent of wages that exceed $18,350 during January and February. No IRS guidance exists about employer reporting required for this provision. Revision is expected to employer quarterly payroll tax forms for the period ending March 31.
Self-employed individuals must carefully evaluate the impact on 2012 estimated tax payments. The recapture provision applies to self-employment tax when income for January and February exceeds $18,350. Therefore, this demands consideration when estimating the tax consequences for all of 2012.
In addition, W-2 forms for this year need revision to convey details for people subject to the recapture tax. Action on this matter is delayed by the possibility of extending the payroll tax cut past February 29. Further legislation is expected. Discussions have occurred for extending the payroll tax cut for the entire year. However, retaining a recapture provision certainly creates the potential for new tax preparer steps next tax season.
The current year tax season is also affected because workers might want assistance in reviewing the accuracy of their paycheck withholding in early 2012. Employers have until January 31 to implement the new rate. When this causes any over-withheld tax during January, businesses should make an offsetting adjustment to the pay of affected workers by March 31. A tax practitioner offering to examine 2012 pay stubs is providing additional service that could add to tax preparer fees this year. Alternatively, free review to assure 2012 payroll tax withholding complies with the law could represent an extra benefit to attract new clients.
IRS Circular 230 Disclosure
Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.