The NASPP Blog

Over the past week there has been a struggle in Washington over whether or not to extend this year’s payroll tax cut (also known as the payroll tax holiday), and, amongst other things, continue unemployment benefits for the jobless. In today’s blog I summarize the issues.

In a Nutshell

Last year around this very time, President Obama signed into law tax legislation that, for one year, reduced the rate of social security payroll tax withholding by 2 percent: from 6.2% to 4.2% (see the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010). With Obama’s approval coming late in the year, and the payroll tax cut to take effect for 2011, payroll processors around the nation scrambled to adjust social security withholdings to the new rate by the deadline of 1/31/2011. In effect for only a year, the payroll tax cut is scheduled to expire on 12/31/2011 – about 9 days from now. This means that effective January 1, 2012, the social security withholding rate will revert back to 6.2%.

Not so Fast…

With the payroll tax cut set to expire next week (on the heels of an election year, amongst other things), our branches of government cannot agree on how to handle the situation. Many argue it wouldn’t look good in an election year to raise taxes, especially with so many Americans still facing economic struggles. The payroll tax cut is only one component of the issue at hand – other affected areas include the extension of unemployment benefits for the jobless.

What’s a Government to Do?

On December 17, 2011, in an unusual Saturday vote, the Senate voted to approve a $30 billion package that included extension of the payroll tax holiday for another two months. The Senate theorized that a two month extension would allow time for all parties to reach a mutually agreeable longer term fix. It seemed possible that the payroll tax holiday would continue, at least in the short term. The “victory”, however small, was short lived. Only 3 days later, House Republicans rejected the Senate bill, placing the future of the social security payroll tax cut in jeopardy. If no agreement can be reached and finalized by December 31, 2011 (and Senate action is unlikely, since the Senate has left town for the year), social security rates will increase to 6.2% on January 1, 2012.

A Holiday in Limbo

With only 9 days left in 2011, and a holiday season in full swing, uncertainty fills the air. While the House does have options available that would allow them to essentially change their minds and affirm the Senate bill, whether they will pursue those options is uncertain. So the clock ticks towards 2012 with one thing certain: that payroll withholding processors need to be prepared for either outcome.

– Jennifer

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