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?