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What does the temporary payroll tax extension mean for taxpayers?

Each filing season, taxpayers seek out tax deductions and credits they may qualify for to help them lower their tax liability or earn a larger refund. However, individuals may also receive some additional from the temporary payroll tax extension that was recently approved.

The extension will reduce the traditional Social Security tax withholding rate of 6.2 percent to 4.2 percent until February 29, 2012. The extension, known as the Temporary Payroll Tax Cut Continuation Act of 2011, follows on the heels of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. According to the provisions of the extension, workers will only have to pay 4.2 percent on the first $110,100 on their wages for the first two months of 2012 for Social Security.

The payroll tax extension also includes a recapture provision, which will impact employees who make more than $18,350 during the two-month period. Employees who make excess of that amount will not receive the benefit.

"This provision imposes an additional income tax on these higher-income employees in an amount equal to 2 percent of the amount of wages they receive during the two-month period in excess of $18,350 (and not greater than $110,100). This additional recapture tax is an add-on to income tax liability that the employee would otherwise pay for 2012 and is not subject to reduction by credits or deductions," the IRS explains.

The extension is expected to positively impact more than 160 million American workers who will receive more money in their paychecks each pay period.

The IRS assures that the reduction will have no impact on employees' future Social Security benefits. Further, the payroll tax extension may be extended throughout 2012 after it expires in February, however, lawmakers are still discussing this possibility.

The additional funds workers bring home can be used in a number of positive ways to strengthen their financial positions and plan for future goals. For example, consider putting the additional funds into a high-interest savings account, retirement fund or 529 tax savings account, the latter two of which may have positive tax implications and special tax treatment. Additional funds may also be used to pay off debt or loans that are weighing households down.


Liberty Tax Service provides computerized income tax preparation and electronic filing. Each tax office offers customers audit assistance, a money back guarantee, and free tax return checking.

About Liberty Tax Service

Liberty Tax Service is the fastest -growing retail tax preparation company in the industry’s history. Founded in 1997 by CEO John T. Hewitt, a pioneer in the tax industry, Liberty Tax Service has prepared over 8,000,000 individual income tax returns. With 42 years of tax industry experience, Hewitt stands as the most experienced CEO in the tax preparation business, having also founded Jackson Hewitt Tax Service.

Liberty Tax Service is the only tax franchise on the Forbes “Top 20 Franchises to Start,” and ranks #1 of the tax franchises on the Entrepreneur “Franchise 500.” Each office provides computerized income tax preparation. electronic filing, and online filing through eSmart Tax.

Category: Taxes

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