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Will the payroll tax holiday be extended?

Aug 19th 2011
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By Ken Berry

President Obama doesn't want the "payroll tax holiday" for workers to end. The administration is calling for an extension of the 2 percent payroll tax break as a way to reinvigorate the economy. "We should extend the payroll tax cut as soon as possible, so that workers have more money in their paychecks next year and businesses have more customers next year,” the president said. Obama also warns that failing to extend the tax break could hamper a moribund economy. "It could mean a million fewer jobs and half a percent less growth."

The payroll tax holiday was included in the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, signed into law late last year. For 2011 only, it creates a 2 percent reduction from the usual 6.2 percent Social Security tax on the first $106,800 of wages. Therefore, the effective Social Security tax rate for employees this year is 4.2 percent. The maximum tax savings for a worker is $2,136.

A comparable 2 percent reduction applies to the usual 12.4 percent Social Security tax portion of self-employment income in 2011; however, employers must continue to pay the full 6.2 percent tax on their share of Social Security tax on wages.

Without any legislative action, the tax cut will expire at the end of the year. Republicans in Congress, who are opposed to extending the payroll tax holiday, generally favor reductions in the individual and corporate income tax rates instead. They hope that such measures will emerge from the closed-door super panel meetings as part of a larger tax reform package. However, at this writing, the prospects for any major legislation being enacted before the end of the year appear slim.

Not every Republican agrees with the party line. Former House Speaker Newt Gingrich, a presidential candidate for the 2012 election, has proposed scrapping the super panel and reinstating the payroll tax break.

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