A week or two ago the Congress passed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. The tax package was designed to extend the Bush era tax rates for another 2 years, in addition doing some other things like adding on 13 more months to expiring unemployment benefits, reinstating the estate tax (while lowering it from previous rates) and extending the $1000 child tax credit. This means that the 2011 federal income tax brackets will remain essentially unchanged – except for some rate range changes due to inflation.
Another change that was passed as part of the tax package is the 2011 payroll tax holiday.
2011 Payroll Tax Holiday
At the end of the year the Making Work Pay tax credit was expiring, and the Obama administration wanted something in the tax bill to replace it. Without it some folks would likely end up seeing a smaller paycheck. To replace it they passed the new 1 year 2011 payroll tax holiday.
The FICA portion of your paycheck tax withholding – or the payroll tax – ( Which funds Social Security and Medicare) will be cut by 2% for 2011.
The withholding rates for your Social Security taxes will go from 6.2% to 4.2% for the 2011 tax year. The other 1.45% of your FICA taxes go to Medicare funding, and will remain unchanged.
What does the payroll tax holiday mean for the average taxpayer? Around a $1000 tax savings. Since the Social Security tax is capped at $106,800, the maximum savings that could be seen by a higher income individual is around $2136. This as opposed to a $400 credit for singles and $800 credit for families under the “Making Work Pay” tax credit.
The Extra 2% Should Be In Your Paycheck Soon
The payroll tax isn’t something that you would ever need to worry about as it is typically calculated and processed by your employer or payroll company. You should just see it showing up in your paycheck soon.
New withholding tables have been released by the IRS now and most employers will begin updating their own tables for payroll soon.
The legislation was passed pretty late in the year so employers will have until 1/31/2011 to put in place the new payroll tax rate of 4.2%, and make any adjustments or corrections by 3/31/2011. You should see the new tax cut showing in your paycheck shortly after the new year. If not you may want to make a trip over to HR to see what the holdup is. :)
What are your thoughts on the new payroll tax holiday? Are you glad they enacted something to take the place of the “Making Work Pay” tax credit? What are your thoughts?
Sure I love the idea of having a bit more in the pay check especially as prices are sky rocketing. But unless government expenses consistantly come below income we are digging ourselves into a worse hole. Totally nuts.
Of course the cutting spending part of the equation always seems to be what gets lost. I’m hoping that they’ll see the light this congressional session and start making some cuts, but as a friend told me – never count on government to cut spending – and as such their power – unless they absolutely have to. Let’s hope they feel like they have to this year.
I applaud the president for moving on a tax cut that will truly benefit the working class in particular. The economy is still too anemic and tax cuts are badly needed.
However, I’m with Olivia in that unless there’s a corresponding cut in federal spending, the tax cut aspect of this is canceled out by the fact that additional debt will take it’s place.
Does anyone get the sense that we’re stuck in this box where there are no really good options???
I do get a sense that we’re kind of stuck where they just won’t cut any spending at all for fear of angering some constituency or another. The longer they wait and the more they increase spending, the worse it’s going to get. *sigh.
I welcome this decrease in Social Security taxes with open arms! So, the FICA portion of my paycheck tax withholding will be cut by 2%. Excellent! I did not know about this until I read your post.
Don’t get too excited, it is apparently only for 2011.
Although this is good for the taxpayers, it doesn’t really stimulate jobs. The employers still have to pay the full portion of the Soc. Sec. taxes. A reduction for employers would have been good – maybe a split for employee/employer.
Either way, I’ll have a little more to put into retirement, which is nice :)
I’m pretty excited for the payroll tax holiday. It will definitely help me out this year.
This payroll tax holiday is certainly very helpful for employees. The Government of Canada reduced from 18% to 16,5% of the federal general corporate income tax rate from January 1, 2011. This should be stimulus for new investors. Those decisions, together with higher control of government spending, definitely can help to get over recession in the North America easier.
Thanks Peter for the heads-up about the payroll tax holiday. I remember hearing about this but it completely slipped my mind. I do payroll for a small non-profit and I’ve yet to receive the IRS Notice 1036. I have some offsetting adjustments to make on the next pay period. Thanks again for your practical help!