As a part of the “Tax Relief and Jobs Creation Act,” passed by Congress in the closing days of 2010, there was a partial payroll tax “holiday” provided to employees in 2011. This provision was set to expire on December 31, 2011. However, late in 2011, Congress extended the provision through February 2012. After much debate and compromise, the payroll tax “holiday” has now been extended through the entirety of 2012.
Under the provision, the employee’s share of payroll taxes is reduced by two percentage points for the remainder of the year. Simply put, instead of an employee having FICA withholding of 7.65%, his or her share is reduced to 5.65%. In addition, self-employed persons (including ministers who are treated as self-employed for Social Security purposes but employees for income tax purposes) will continue to see their overall SECA payroll tax liability stay at 13.3%, rather than the normal 15.3%, for the remainder of the year.
Under the regular payroll tax rules, an employee faces a reduction of 7.65% from his or her compensation to pay their share of payroll taxes. The employer, in turn, pays a like amount of 7.65% above the employees’ compensation as a matching share of the payroll tax liability. Each share is divided among Social Security taxes (6.2%) and Medicare taxes (1.45%). The self-employed person has to pay both shares, equaling 12.4% for Social Security and 2.9% for Medicare.
The tax holiday provided for under the Tax Relief Act of 2010 reduced the employee’s share of the Social Security tax to 4.2% (rather than 6.2%), maintained the Medicare portion at 1.45%, and maintained the employer’s share at a total amount of 7.65%.
Effectively, this provision of the Tax Relief Act gave all employees a 2% raise in 2011 – and now in 2012 as well. This provision was included in the tax bill as a way to stimulate the economy by providing more income in the pockets of American workers.
The Internal Revenue Service has issued new withholding tables (Publication 15) that contained this payroll provision. Since both church employees and ministers are impacted by this change in the law, churches should continue to use the updated tables found in Publication 15 during the entirety of 2012. If you do not use the new tables, over-withholding will occur.
Since this payroll tax reduction will go away at some point – now projected to be the end of 2012, employees should be encouraged not to become dependent upon these newly found dollars. Increasing salary reduction withholdings and putting the additional 2% in one’s retirement account allows the employee or minister to increase their retirement account and also not become dependent upon this additional amount in future paychecks after December 2012.