January 1, 2012 – by Barbara Waltman
As 2011 came to a close, there was considerable uncertainty about specific payroll and federal income tax rules affecting small businesses and their owners. Here are the rules effective at the start of 2012.
Payroll tax cut extension
On December 23, 2011, the Temporary Payroll Tax Cut Continuation Act of 2011 was signed into law. This provides a two-month extension of the two-percentage-point reduction in the Social Security portion of FICA taxes paid by employees. It also provides the same reduction in the employee equivalent portion of self-employment taxes.
Employers are directed to implement the tax cut as soon as possible in 2012, but no later than January 31, 2012. If any Social Security tax has been overwithheld, an offsetting adjustment should be made in employees’ pay no later than March 31, 2012.
Special recapture rule for high earners. The cut applies only to the first $18,350 in wages received in January and February. If an employee earns more than this amount, there is an additional income tax on the excess wages. This additional income tax will be recaptured, which means it will be reported on the 2012 return filed in 2013.
New for 2012. Remember that the wage base for the Social Security tax has increased to $110,100, up from $106,800 in 2011.
Expiring federal income tax rules
Congress failed to extend dozens of income tax breaks that expired on December 31, 2011. It is likely that many will be extended in 2012, probably retroactively to January 1. However, you may want to delay action based on a tax break until it has been extended. These breaks include:
- Retention of the higher Sec. 179 deduction amount.
- Retention of 100% bonus depreciation.
- Research credit.
- 15-year amortization for certain leasehold expenses.
- Expensing of “brownfields” remediation costs.
- Certain enhanced charitable contributions.
- Work opportunity credit (with the exception of the new categories for unemployed veterans).
- Employer credit for wage differential payments to activated military personnel.
Be sure to check for tax changes on the state level that can impact your payroll and income taxes. Work with a knowledgeable tax advisor to implement the changes that affect you. Also, consider using a payroll service to handle payroll withholding and ensure that you are complying with the new law as well as law changes when they come along.
Barbara Weltman is an attorney, prolific author with such titles as J.K. Lasser’s Small Business Taxes and The Complete Idiot’s Guide to Starting a Home-Based Business, and trusted professional advocate for small businesses and entrepreneurs. She is also the publisher of Idea of the Day® and monthly e-newsletter Big Ideas for Small Business® at www.barbaraweltman.com and host of Build Your Business radio. She has been named one of the 100 Small Business Influencers for 2011. Follow her on Twitter @BarbaraWeltman.