A payroll tax cut extension through February 2012 was passed by Congress and signed by President Barack Obama on Dec. 23, 2011.

The Temporary Payroll Tax Cut Continuation Act of 2011 extends the 2 percentage point payroll tax cut for employees, continuing the reduction of their Social Security tax withholding rate from 6.2 percent to 4.2 percent of wages paid through Feb. 29, 2012.

Seems simple enough, however, the Senate also added a cap to the amount of wages that can benefit from the lower rate to one sixth of the $110,000 maximum salary or $18320 that is subject to Social Security tax for 2012. – without this cap, very high earners could potentially exceed the maximum taxable salary before the temporary extension expired and get the full annual tax savings ($2202) in the two month window.

Additionally, under the terms negotiated by Congress, the law includes a new "recapture" payroll tax provision, which applies only to those employees who receive more than $18,350 in wages during the two-month period. This provision imposes an additional income tax on these higher-income employees in an amount equal to 2 percent of the amount of wages they receive during the two-month period in excess of $18,350 (and not greater than $110,100).

The recapture tax would be payable in 2013 when the employee files his or her income tax return for the 2012 tax year.

With the possibility of a full-year extension of the payroll tax cut being discussed for 2012, the IRS will monitor the situation closely in case future legislation changes the recapture provision.

The IRS will issue additional guidance as needed to implement the provisions of the two-month extension, including revised employment tax forms and instructions and information for employees who might be subject to the new recapture provision. For most employers, the quarterly employment tax return for the quarter ending March 31, 2012, is due April 30, 2012.

Employers should implement the new payroll tax rate as soon as possible in 2012 but not later than Jan. 31, 2012, and for any Social Security tax over-withheld during January, employers must make an offsetting adjustment to the employees pay as soon as possible but not later than March 31, 2012.

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