I’m happy as I write today’s blog to say that I hope this may be my last blog in a long while on this topic. Who would’ve thought that something as benign as a social security withholding rate could create so much buzz.
Last Friday, Congress passed an extension of the payroll tax cut that will keep the social security withholding rate at 4.2% for the rest of 2012. President Obama has said he will sign the bill as soon as he returns home from a trip to the western U.S., so it looks like a done deal.
What You Need to Know
• All social security withholding for 2012 will be at the rate of 4.2%, subject to the annual maximum of $110,100. Essentially, we are back to “business as usual” – the end result being that this year’s withholding mechanics will be no different than any other year from a social security perspective.
• Since the social security withholding rate will be the same for the entire calendar year, any concern about monitoring the annual maximum on a manual basis (the issue being that with two different withholding rates in effect for a calendar year, the annual maximum would be virtually different for every employee) has been eliminated.
• While the social security rate for 2012 will be set at 4.2%, remember this is considered a temporary tax cut. As a result, the issue of withholding rates will rise again as we draw near 2013, because the payroll tax cut is now set to expire on 12/31/12.
Obama hasn’t signed the bill yet, but has stated that he will. So, it appears that, finally, we can put this issue to bed for now.
– Jennifer
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so we keep an ongoing “to do” list for you here in our blog.
Attend local NASPP chapter meetings in Austin, Phoenix, Sacramento, and the Twin Cities. Barbara Baksa, the NASPP’s Executive Director, and Larry Reynolds of E*TRADE will be presenting on cost-basis reporting at the Sacramento meeting. Be sure to say hello!
As I write this week’s blog, I was hoping to have something “final” to say about the status of the payroll tax cut and its future. It would be really nice to put this topic behind us. Well, the answer’s not final yet, but there is news this week. Emerging Wednesday was word on the street that leaders of Congress have finally reached an agreement that will extend the payroll tax cut through the end of the year.
Cut to the Chase
I’ve blogged about this extensively, so I won’t recap all of the variables here. In short, the tax cut that resulted in the current social security tax withholding rate of 4.2% is anticipated to be extended through the end of the year. I don’t know about you, but I am exhaling a big sigh of relief for all of the issuers and their vendor partners. I didn’t envy the possibility of having to figure out how to deal with two different withholding rates in a calendar year. If this likely resolution stands, then the issue of multiple social security withholding rates will cease to exist, at least for 2012.
If and when the payroll tax cut extension transpires, we’ll post more info here and on our Facebook page. Now is a great time to “Like” us on Facebook if you haven’t already.
Some Interesting Feedback
On a separate note, last week I blogged about the artist, contracted by Facebook to paint their corporate offices, who stands to make a reported half billion dollars in stock option gains when Facebook goes public. You may recall that I threw a poll in for fun, wanting to know if you felt the potential stock option gains were justified. I expected some strong responses, and an overwhelming response I got! 93% of respondents either loved the concept of his risk/reward outcome or felt it was a simply an outcome that was rightly possible from the start. Only 7% thought it was a ridiculous scenario. I hadn’t planned to blog about the results of the poll, but the fact that the results were so much in support of the big potential payout got me thinking. What I like about the poll feedback is that it reminds me that we are professionals who “get” stock compensation. Stock compensation, particularly stock options, is a risk/reward proposition from the get-go. You’re granted stock options at a strike price, and then there are no guarantees. We’ve seen years of underwater stock options – so we’re well aware that stock prices can fall and options can be worthless. The flip side is that the stock price can appreciate and the stock options can have value. As stock plan professionals, I know we’re always rooting for the appreciation scenario; that’s the whole idea behind granting stock options. And, let’s admit it, it’s much more fun to administer a stock plan with options that are “in the money” than those that have no hope of ever having value. Somehow the energy that comes from people “cashing in” and reaping rewards for their hard work is much different than the empty feelings associated with worthless compensation.
The Facebook artist must have had some idea (in fact, in several media reports he was quoted saying that back when he took the stock options, he thought that Facebook was “ridiculous and pointless”) that accepting stock options in lieu of cash compensation was a risk/reward proposition. He took the risk, when the company was young and uncertain. I was excited that 93% of you felt that this was the ultimate appreciation scenario playing out in front of our eyes. Isn’t that what we wish could happen each and every time we granted employee stock options? Yes, that can’t be reality, but it’s sure fun to see some big payoffs for those who put their money on stock compensation payoffs – especially when cash was an alternate available choice.
I had a couple of people ask me this week about the future of the Payroll Tax cut and whether Congress has made any progress in determining the future of the cut in anticipation of the expiration of the temporary extension on February 29, 2012. A quick search of my Google Alerts turned up the latest and greatest on this, and a few other topics. So for this week’s blog, I’ll hit on a couple of updates and interesting tidbits from the news.
Where Does the Payroll Tax Cut Stand?
It’s February (already!), and that question is understandably resurfacing. If you’re just emerging from winter hibernation, I’m talking about the future of the present reduced social security withholding rate of 4.2% (see earlier blogs on this topic). Unless Congress acts by the end of the month, the social security withholding rate will revert back to 6.2% on March 1, 2012. The current news on this topic is that there is no real news. Negotiations in Congress seem to be almost exactly where they were back in December – gridlocked over some sticking points. The issues are broader than just the cut in social security withholding – things like unemployment insurance benefits are also part of the mix. As one CEO of a large payroll company put it, “I have no opinion about whether or not the payroll tax cuts should be extended. Those decisions are for our elected representatives to make, if they can be convinced to make them. However, I do have two important questions. Do the members of the House and Senate know enough about how payroll works to understand the way in which their stifling indecision and last-minute changes are unnecessarily adding costs to American businesses, creating anxiety for American workers and adding complexity to our tax system?” I’ll second that. The clock is ticking and there are only 20 days left until the temporary extension expires, so stay tuned for more on this topic. We’ll address any changes or issues as the deadline draws nearer.
An Artist, a Social Network and an IPO: Oh My!
While I don’t have much to say about the general Facebook IPO buzz (yet!), one thing crossed my radar this week and I just couldn’t resist a mention. What caught my attention was a story (which turned into many stories) about an artist who seemingly stands to make millions in the Facebook IPO, all because he accepted stock options in lieu of a reported $60,000 in cash as compensation for painting the corporate headquarters during the company’s infancy. Did I mention he stands to reap not just millions, but hundreds (yes, with an “s”) of millions (estimates put the value of his stock options as much as $500 million)? Now, it seems certain that there will be many employee stock option millionaires once Facebook makes its public trading debut. That’s been expected, so it’s not such big news. Stories like that of this artist tend to infiltrate the media, because they capture the essence of what captivates many about the American dream. Work hard, take some risks, make good decisions, have a bit of luck, get rich. Or, at least build a respectable future. The story of this artist has all the makings of a movie – a rough start, including jail time, for this guy who reportedly turned his life around and became a very successful artist in his own right. Then, add in a Facebook IPO and all of his hard work (and then some) will pay off in a way only dreams can. I don’t want to devalue all of the employees who work incredibly hard day in and day out, earning their stock options bit by bit. What I enjoy about these stories on a very general level is that even though they are one-in-a-million, they keep our dreams about stock options and other forms of risk/reward compensation alive. It’s great publicity for stock options as a vehicle. Sure, it may not happen to everyone, but it does remind us that stock options (and other forms of equity compensation) can be a great compensation tool. While the returns may be greater in a company like Facebook, the reality is that it doesn’t need to take a multi-billion dollar IPO to reap positive rewards from stock benefits. There are many “success” stories.
I’m throwing in a poll this week for fun, and would love to see where you stand.
Over the last couple of weeks I’ve blogged about the status of the social security payroll tax cut. If you’re catching up after a nice holiday break, the gist of the issue was whether Congress would extend the 4.2% social security tax withholding rate that was in effect for 2011 (in the end they did, for 60 days, through February 29, 2012.) Today, I explore some of the administrative considerations associated with the temporary extension of the payroll tax cut.
Administering Multiple Social Security Withholding Rates in One Calendar Year
Although the continuance of the social security withholding rate at 4.2% for another 60 days is seemingly good news for an estimated 160 million affected workers, there are some administrative areas that will need monitoring or adjustment. First, if the social security tax withholding rate changes mid-year (as is now scheduled to happen effective March 1, 2012), the maximum withholding amount for 2012 will be different for each employee, based on how much they earned before and after the rate change. This could be a challenge for software programs that cap social security withholding based on a maximum withholding amount, rather than wages.
Let’s look at some examples:
Employee A earns $20,000 in wages up through February 29, 2012. The same employee earns $100,000 between March 1 and December 31, 2012. In this example, his/her maximum withholding in 2012 is $6,426.00 ($20,000 x 4.2% and $90,100 (the $110,100 limit less the $20,000 already paid) x 6.2%).
Employee B earns $25,000 in wages up through February 29, 2012. This employee earns another $125,000 in wages between March 1 and December 31, 2012. His/her maximum withholding is $6,326.20 ($25,000 x 4.2% plus $85,100 x 6.2%).
Software programs that cap social security based on a maximum number will be looking to max people out at the same maximum amount across the board. As we can see from the examples above, the maximum amount of social security withholding will vary by individual. Be sure to check with your software provider or third party administrator to understand how social security withholding is calculated, and whether any work around will be necessary. The first two months of the year will be easy: you just withhold at the 4.2% rate across the board, up to the maximum of $4,624.20 ($110,100 x 4.2%). If Congress acts to extend the payroll tax cut for the entire year, none of the concern about the maximum withholding will matter. We’ll just simply apply the 4.2% withholding rate, up to the maximum of $4,624.20 for the entire year. However, if Congress does not extend the 4.2% rate and it reverts back to 6.2%, you may need to have some procedures in place to ensure that each person’s withholding reflects the correct maximum (again, it will be individually based, depending on what was withheld before and after the rate change). I’m already seeing postings in our discussion forum about this topic, so those who have ideas about how to administer this, please stop on by and share them.
A Tax Cut Recaptured
Also included in the legislation is a “recapture” provision that essentially recoups some tax dollars from employees who earn more than $18,350 by February 29th. Employees who earn more than $18,350 during the first two months of 2012 will be subject to an additional 2% in income tax (not additional social security tax). While it makes for a basically tax-neutral position for the employee (4.2% social security + 2% income tax = 6.2%, simply speaking), the company still needs to withhold at the lower 4.2% social security tax rate. This could be a key area of communication for employees who have significant income events in January and February (such as option exercises, RSU vestings, performance share delivery, etc.). How the 2% recapture tax will be collected is not yet entirely clear.
More Information
Lastly, the IRS has published notice IR-2011-124 with information regarding the payroll tax cut and recapture tax. In short, the new tax rate of 4.2% needs to be in effect by January 31, 2012, and any over withholding (for companies that went back to 6.2% in anticipation of the tax cut expiring) should be returned through an offsetting adjustment in pay as soon as possible, but no later than March 31, 2012.
It looks like our 2012 year is off to an interesting start!
I hope everyone has been enjoying the holiday season. In between overindulging in yummy food and preparing to ring in the New Year (is it really 2012 already?), I wanted to take a moment to highlight a few timely tidbits.
Don’t Forget…
Hurry! Renew your NASPP membership for 2012 (if you aren’t an NASPP member, join today). Don’t miss out on any content; make sure you renew your membership before you head off to those New Year’s Eve parties!
Slow week in the office? Looking for something fun to pass the time this holiday week? Be the first to measure your global tax withholding practices in our new Compliance-O-Meter. In addition, you can participate in the Question of the Week Quiz. If you haven’t been playing all year, this is a great time to start: scores reset next week and it’s a whole new game!
In the News…
Last week I blogged twice about the drama over the payroll tax cut and whether or not it would be extended past January 1, 2012. On Friday, December 23rd, the House and Senate both passed a measure extending the cut for two additional months, through February 29, 2012. President Obama signed off on the extension the same day, ending the controversy for now. This means that there are no imminent changes to the social security tax withholding rate; it will remain at 4.2% as we advance into the New Year. The payroll tax cut is certain to be an area of debate in the next couple of months, so stay tuned for more on this topic.
I wish everyone a safe and happy New Year. See you in 2012!
Yesterday, I blogged about the uncertainty around the expiration of the social security payroll tax cut that has been in place for 2011. Hours later, House Republican leaders agreed to basically the same deal they had rejected just two days prior, providing temporary resolution to a last minute debate.
The agreement includes extending the social security payroll tax cut for another two months, through February 29, 2012. This means the social security withholding rate would remain at its present 4.2% for now; government leaders will have two months to figure out a longer term plan. The House of Representatives, in a pro forma session, could pass the bill as early as today, December 23, 2011, after which the Senate would do the same. If an objection is raised on the floor of the House, then House speaker Boehner would summon Congress back for a formal vote next week. Never say never, but Thursday’s events made considerable progress towards securing an extension of the payroll tax cut.
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
It’s renewal time! All NASPP memberships expire on December 31; renew your membership today so you don’t miss out on the NASPP in 2012.