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Will the Payroll Tax Cut Be Extended?

The 2011 Payroll Tax Cut [1] is set to expire at the end of this year. Based on the current state of our economy, will the payroll tax cut will be extended for another year? Will we see a payroll tax cut 2012?

The Payroll Tax Cut

The payroll tax cut, also called the payroll tax holiday, lowered your payroll taxes this year. During 2011, you only had to pay in 4.2% of your first $106,800 in wages to Social Security [2]. At the end of the year, when the payroll tax cut expires, the rate will return to 6.2% of your salary. (The employer contribution was not lowered and remained at 6.2% all year.)

2012 Update: Congress extended the payroll tax cut for the rest of the year; the payroll tax cut now applies to all of 2012.

Prior Update: Congress voted to extend the payroll tax cut for 2012. The 2 month extension of the payroll tax cut will be followed by more negotiations to extend the payroll tax cut for the entire 2012 calendar year.

Old Updates: Congress was originally debating a few proposed options: a 2 month extension of the payroll tax cut on the first $18,350 of wages or a one year extension of the current payroll tax cut. If Congress does nothing to extend the payroll tax cut for 2012, it will expire and go back to the normal tax rate on January 1, 2012. We’ll continue to keep you updated.

Paycheck Impact

Since the payroll tax cut was a replacement for the Making Work Pay [3] tax credit in prior years, we’ve grown accustomed to seeing the tax cut on our paychecks.

People seem to have short memories when it comes to changes in their paychecks (remember when Jill put together the great graphs to see what your paycheck will look like [1]?), I would guess that many people would feel like the payroll tax cut expiration is an increase on taxes, even without a change in the tax brackets [4].

Taking One Year at a Time

And like every tax law that is put in place for just one year, it means we’ll have to revisit it again the following year to debate whether or not to let the law expire or to extend it another year.

And just like clockwork, a proposal is in the works for a payroll tax cut extension [5] with a price tag of $112 billion.

The proposed payroll tax cut 2012 would look similar to this year, once again lowering social security contributions from 6.2% to 4.2%. Although after the debt ceiling issue, I’m wondering if we’ll have to wait until December 31 to find out if there will be an extension or not. What do you think?

Will there be a payroll tax cut extension?

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