Federal action has passed an extension of the reduced payroll tax rate that went into effect in 2011. The first extension, called the Temporary Payroll Tax Cut Continuation, is for the first two months in 2012. In late February, Washington passed another extension to allow the reduced tax rates to continue until the end of 2012.
The 2011 provision created a 12 month “holiday” from some payroll taxes. It created a 2 percent reduction in the Social Security tax withholding rate for 2011. This moved the tax rate from the normal 6.2 percent down to 4.2 percent of the wages.
These extending measures, recently passed, have extended the tax rate cut through the end of 2012. Washington continues to debate the idea of a full-year extension for the Payroll Tax Cut.
Benefits to you, as the business owner:
Less money being withheld means more money to invest in your business.
As the business owner, you want to make sure your business is processing its payroll using the most recent rates. Check with your payroll department, or payroll processing outsource to confirm they are up-to-speed on this legislation.
They should know:
Jan 31, 2012 is the date you should not have changed back to the old rate, but rather should have continued to use the 4.2 percent figure.
March 31 is the last date to fix any errors in withholdings for your first quarter payroll. So, if you discover your company switched back to the 6.2 percent rate in January of 2012, you must make the correcting offsetting adjustment before April.

Modern Business Associates is an HR company that focuses on payroll and HR outsourcing. We routinely work with clients on payroll processing. As a Professional Payroll and HR outsource organization, our clients rely on us to help them effectively deal with these kinds of topics.