This past week 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 to extending unemployment benefits, lowering the estate tax and other smaller measures. This means that the 2011 federal income tax brackets will remain essentially unchanged.
A few new tax measures were created in addition to extending the current rates, however. Among them was the 2011 payroll tax holiday.
2011 Payroll Tax Holiday
One measure that President Obama wanted to pass as a replacement to the expiring Making Work Pay tax credit that was enacted in 2009 is the new 1 year 2011 payroll tax holiday. The payroll tax, or FICA portion of your paycheck tax withholding – 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 that 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.
When Will I See The Extra 2% In My Paycheck?
Typically the payroll tax is taken care of by your employer or the company that processes your payroll. You as the employee shouldn't need to take any action – like filling out a W4 withholding form.
New withholding tables have been released by the IRS now, so most employers will begin updating their own tables soon. Since the legislation was passed so late in the year, 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. So you should starting seeing it shortly after the new year. If you haven't seen the changes in your paycheck byFebruary, you may want to ask your HR department when the change will be happening.
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?
I love the 2% discount from the government. I like this much better than the “making work pay” since I didn’t qualify for that one. The tax saving is going straight to the upcoming bundle of joy (bundle of expense?.)
I hear ya, and agree. We just added our own bundle of joy this year, so we’ll be getting that nice $1000 tax credit! :)
You must be under a certain income cap for the 1000 tax credit, otherwise…no go.
Correct. The caps are:
Income limit of $75,000 for single parents.
Income limit of $110,000 for married couples.
Income limit of $55,000 for married filing separately.
$1000 child tax credit
I won’t see it because I am a teacher. I am in another program, but I think it is good for everyone else. All you lucky ones spend it wisely!
Seems to me the social security system is already broken, and this won’t help matters. Obama promised a tax increase on the high earners (let’s not call the ‘rich’ I have no idea what their net worth is) 250k and above. The payroll tax is handing them $2100 they didn’t expect or ask for.
This Social Security investment cut is the most idiotic maneuver I have seen in American politics, especially from Democrats. What have we learned over the last two decades about the Republican and corpratist view of Social Security? The answer is that if they can’t control the money through their “we own America” views, then it should be destroyed. And yet the Democrats let a cut in workers’ investment in their own retirement plan be included in a tax “deal.”
The Republican mantra over the years is that Social Security is collapsing, it’s going to fail, it’s a bad thing for America. And now we take billions in contributions away for a year. I’m sure that the next step will be that employers will be saying that since the employees aren’t contributing they shouldn’t have to “match” the contribution.
The same amount of money could have been provided to every taxpayer by lowering the middle income tax rates again. This wouldn’t have put Social Security on the block for future crazy political deals.
This looks like a move to purposely create more of a funding crisis for Social Security. How Social Security participatants have let this happen without demonstrations and riots on Main Street is amazing.
If this is the advice that Obama is getting from his Staff, he needs to fire them all and start over!
So since I’m used to the government taking so much out of my check I’ll just divert that money to the retirement account. They’re just helping me add to the retirement fund.
Very interesting post! I wonder how this temporary cut in Social Security taxes will affect the lifetime/longevity of the Social Security system.
Personally, I’m not counting on social security at all at this point because I have a feeling it’ll be broke by the time i retire.