Temporary Payroll Tax Cut Continuation Act of 2011

What did our disfunctional Congress do before leaving town for Christmas?

At the eleventh hour, Congress approved a two-month extension of the employee-side payroll tax cut in 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.

OASDI tax rate. Social Security's Old-Age, Survivors, and Disability Insurance (OASDI) program and Medicare's Hospital Insurance (HI) program are financed primarily by employment taxes. Prior to 2011, the OASDI tax rate was 6.2 percent for employees and employers, each; and the OASDI tax rate for self-employment income was 12.4 percent.

OASDI limits the amount of earnings subject to taxation for a given year. This limit changes each year with changes in the national average wage index. For 2011, the OASDI wage base was $106,800. The OASDI wage base is $110,100 for 2012. There is no limitation on HI-taxable earnings.

2011 temporary reduction. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 reduced, for wages and salaries paid in 2011 and self-employment income in 2011, the OASDI tax by two percentage points, applied to the portion of the tax paid by the employee and the self-employed individual (4.2 percent and 10.4 percent, respectively). The employee-side payroll tax cut under the 2010 Tax Relief Act was scheduled to expire after December 31, 2011.

Two-month extension. On December 23, 2011, Congress approved and President Obama signed a two-month extension of the employee-side payroll tax cut. The Temporary Payroll Tax Cut Continuation Act of 2011 extends the two percentage point employee-side payroll tax cut through the end of February 2012.

Recapture. Shortly after President Obama signed the Temporary Payroll Tax Cut Continuation Act, the IRS explained that the new law includes a recapture provision, which applies to individuals who receive more than $18,350 during the two-month extension period. The OASDI wage base for 2012 is $110,100, and $18,350 represents two-months of the full-year amount. The recapture tax would be payable in 2013 when the employee files his or her income tax return for the 2012 tax year. The House Ways and Means Committee reported that the recapture provision will only apply if the payroll tax reduction is not extended for the remainder of 2012.

Implementation. The IRS instructed employers to implement the reduced payroll tax rate as soon as possible in 2012 but no later than January 31, 2012. For any Social Security tax over-withheld during January, employers should make an offsetting adjustment in employees’ pay as soon as possible but no later than March 31, 2012, the IRS advised.

NYS Tax Law Changes for 2012

Condensed summary of NYS law changes as provided by our friends at CCH.

New York Gov. Andrew M. Cuomo has signed legislation containing new credit provisions and modifications to the corporate franchise and personal income tax rates, including a restructuring of the individual income tax brackets. The legislation also contains property tax provisions, which are reported separately.

Individual Income Tax Changes

Under the legislation, for joint filers in taxable years beginning after 2011 and before 2015, taxpayers with New York taxable income of $40,000 to $150,000 will be taxed at 6.45% (previously, 6.85%); taxpayers with New York taxable income of $150,000 to $300,000 will be taxed at 6.65% (previously, 6.85%); taxpayers with New York taxable income of $300,000 to $2 million will be taxed at 6.85% (previously, 7.85% to 8.97%); and taxpayers with New York taxable income over $2 million will be taxed at 8.82% (previously, 8.97%).

For taxpayers with other filing statuses, the top 8.82% rate will apply to head of household filers with New York taxable income over $1.5 million and to single filers with New York taxable income over $1 million. The legislation also provides for a cost of living adjustment to the brackets and the standard deduction.

The Department of Taxation and Finance has announced that it is developing new withholding tables that will be effective on January 1, 2012.

Metropolitan Commuter Transportation Mobility Tax

Metropolitan commuter transportation mobility tax (MCTMT) provisions are amended to exclude certain small businesses from the tax. Specifically, the legislation modifies the definition of "employer" to provide that payroll expense must exceed $312,500 (previously, $2,500) in any calendar quarter. The definition is also amended to exclude eligible educational institutions.

In addition, the MCTMT, previously imposed on employers at the rate of 0.34%, is imposed at the following rates: 0.11% for employers with payroll expense no greater than $375,000 in any calendar quarter; 0.23% for employers with payroll expense no greater than $437,500 in any calendar quarter; and 0.34% for employers with payroll expense exceeding $437,500 in any calendar quarter. For self-employed individuals, tax at the rate of 0.34% applies if earnings attributable to the Metropolitan Commuter Transportation District exceed $50,000 (previously, $10,000) for the tax year.

The MCTMT amendments applicable to employers take effect for the quarter beginning on April 1, 2012.

Corporate Franchise Tax on Manufacturers

The legislation provides a 50% rate reduction under the corporate franchise tax for eligible qualified New York manufacturers, for taxable years beginning after 2011 and before 2015.

The Commissioner of Taxation and Finance is required to establish guidelines and criteria specifying the requirements for a manufacturer to be classified as an eligible qualified New York manufacturer. The criteria may include factors such as regional unemployment, the economic impact that manufacturing has on the surrounding community, population decline within the region, and median income within the region.

Credits

The legislation creates the Youth Works Tax Credit Program, under which credits are available for employing at-risk youths in part-time and full-time positions. Qualified employers are entitled to a credit of $500 (full-time) or $250 (part-time) per month for up to six months for each qualified employee. Employers are also entitled to $1,000 (full-time) or $500 (part-time) for each qualified employee who is retained for an additional six months. Qualified employees must start their employment on or after January 1, 2012, and no later than July 1, 2012. Up to $25 million in tax credits may be allocated under this program.

The legislation also creates the Empire State Jobs Retention Program, which provides credits to targeted businesses harmed by a natural disaster. Participants in the program must (1) be located in a county in which an emergency has been declared by the governor on or after January 1, 2011, (2) demonstrate substantial physical damage and economic harm resulting from the event leading to the emergency declaration, and (3) retain at least 100 full-time equivalent jobs in the county. The credit equals 6.85% of the wages of retained jobs.