On December 23, 2011, Congress passed the Temporary Payroll Tax Cut Continuation Act of 2011, which was subsequently signed by the President. The legislation extends the 2% reduction in the employee portion of FICA taxes in effect for 2011 through February 29, 2012.

The payroll tax reduction was first implemented for 2011 and reduced FICA taxes withheld from employee compensation. Before the reduction, FICA included a Medicare tax equal to 1.45% of covered wages, and a social security tax equal to 6.2% of covered wages up to the wage base limit for each employee. Effective for 2011, the social security tax paid by employees was reduced by two percentage points to 4.2% up to the 2011 wage base of $106,800.

The legislation continues the reduced 4.2% rate until February 29, 2012. Under the bill, if an individual earns more than $18,350 (two-twelfths of the 2012 wage base of $110,100) during the first two months of 2012, the individual is subject to an additional 2% tax on the excess over $18,350. This is intended to prevent high-income earners from paying the reduced tax rate on a greater portion of their earnings.

Employers should monitor developments related to the payroll tax reduction to determine whether the reduction will be extended beyond February 29, 2012. PLC Employee Benefits & Executive Compensation will continue to track developments related to this legislation.