obama-speech-sept8.pngWith the unemployment rate stuck above 9%, 14 million Americans out of work and economic growth at stall speed, President Obama last night proposed to a Joint Session of the U.S. Congress a new $447 billion plan he says will “jolt” the economy and create new jobs.

While specifics are not yet available, it’s clear that the centerpiece of the President’s plan—$240 billion of it—is an extension and expansion of the payroll tax holiday enacted in December 2010.

The payroll tax holiday in effect for 2011 reduces the employee Social Security tax rate from 6.2% to 4.2%, putting an average of about $1,000 in workers’ pockets. This law is set to expire at the end of this year, effectively “increasing” taxes on workers in 2012. Read more.

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The President’s Speech: Focus on Payroll

Fri Sep 9, 2011

obama-speech-sept8.pngWith the unemployment rate stuck above 9%, 14 million Americans out of work and economic growth at stall speed, President Obama last night proposed to a Joint Session of the U.S. Congress a new $447 billion plan he says will “jolt” the economy and create new jobs.

While specifics are not yet available, it’s clear that the centerpiece of the President’s plan—$240 billion of it—is an extension and expansion of the payroll tax holiday enacted in December 2010.

The payroll tax holiday in effect for 2011 reduces the employee Social Security tax rate from 6.2% to 4.2%, putting an average of about $1,000 in workers’ pockets. This law is set to expire at the end of this year, effectively “increasing” taxes on workers in 2012.

The President’s plan would extend the payroll tax holiday into 2012 and expand it—for both employees and employers.

For employees, the 2012 tax holiday would be increased from 2% to 3.1%, i.e., to one-half of the regular Social Security tax rate. This would translate into a payroll tax cut for the average worker of about $1,500, since Social Security taxes would be 3.1% instead of 6.2%.

For employers, first, the President’s plan would, for 2012, reduce the employer share of Social Security taxes from 6.2% to 3.1%, but on only the first $5 million in payroll.

While all employers would be eligible for the payroll tax break, the President’s intent is to target this tax cut on small business. The White House estimates that 98% of firms have a total annual payroll of less than $5 million.

The White House Fact Sheet explaining the President’s plan gives an example of a firm with 50 workers earning an average of $50,000 per year, for a total payroll of $2.5 million. The payroll tax cut of 3.1% would save this firm just under $80,000 in 2012.

It’s not yet clear how employers would actually claim this 3.1% payroll tax holiday—presumably on their quarterly Forms 941.

The second part of the employer payroll tax cut is even more dramatic: it’s a 100% payroll tax holiday, technically a Social Security tax “refund,” of all employer payroll taxes paid in connection with either new hires or wage increases for current workers above the previous year’s payroll.

This 100% payroll tax refund would be capped at applying only to the first $50 million in total wage increases over the previous year, related either to additional employees or higher wages to present employees, or both.

The White House example is a firm that last year had a total payroll of $7 million and this year hires 40 additional workers, adding $2 million to payroll. That firm would receive a full refund of the 6.2% payroll taxes paid on the additional $2 million in wages—for a total tax cut of $124,000.

Incidentally, this 100% refund would be in addition to the 3.1% payroll tax rate reduction on the firm’s base payroll of $7 million, i.e., $155,000 (3.1% times $5 million, the maximum countable wage amount).

There are many questions about President Obama’s “American Jobs Act,” not the least of which is whether Congress will approve it. And a key factor in that vote may very well be how it will be paid for. The President did say that he intends to provide a detailed plan on September 19, pledging that his $447 billion plan will not add to the federal budget deficit.

Another important consideration for Congress is that the combined employee and employer payroll tax cuts would siphon off about $240 billion destined for the Social Security Trust Fund—already forecast to run out of money in 25 years. The U.S. Treasury will need to issue additional special bonds to the Social Security Administration, essentially offsetting the payroll tax cuts with general revenue.

Ceridian will keep a close eye on Capitol Hill as Congress begins to examine the President’s new job creation plan. While the plan is unlikely to be approved in full, the payroll tax holiday in some form has the best chance of winning bipartisan support and being enacted into law.