Thursday, January 19, 2012


Throughout 2011, as a method of stimulating consumer spending, Congress had reduced the employee share of the Social Security tax, as well as the self-employment tax rate, by 2%. But when it came time to extend this cut for 2012, Congress could not agree on how to pay for a full one-year extension. As a result, the 2% cut is only officially in the law at this point through February 29, 2012.

If Congress does not agree on an extension for the full year, there is a small planning point for those who are employees of their own corporation, or who issue occasional salary checks to family members for their services in the business.

In order to receive the 2% waiver, payroll must be issued in the first two months of 2012. And to maximize the savings, the worker must receive at least $18,350 of compensation in the first two months of the year ($18,350 is 1/6th of the $110,100 maximum amount subject to Social Security tax in 2012). So for those who only draw an occasional paycheck from their business, such as an S corporation or a C corporation, there is a tax savings (albeit under $400) if roughly $18,000 of that payroll is drawn within the first two months of 2012.

But note: If Congress extends the 2% cut for all of 2012, this becomes a moot point.