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How Do I Implement the 2011 Payroll Tax Cut for Employees?

January 26, 2011

In 2011, millions of employees will receive a significant boost in their take-home pay as a result of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (2010 Tax Relief Act) enacted December 17.  In addition to maintaining the current lower individual income tax rates, the 2010 Tax Relief Act reduces the employee's share of the OASDI portion of Social Security two percentage points, from 6.2 percent to 4.2 percent, for wages earned during the 2011 calendar year, up to the taxable wage base of $106,800.  Many workers can expect to see an average tax savings of more than $1,000 as a result of this payroll tax cut.  Moreover, the payroll tax reduction is available to all wage earners irrespective of income level, with no phaseout.  In effect, individuals earning at or above the OASDI cap of $106,800 will receive $2,136 in tax savings in 2011.

The employer's share of OASDI, however, remains at 6.2 percent.  As a result of this payroll tax "holiday" for employees, employers will need to implement the 2011 cut in payroll taxes, in addition to new income tax withholding tables that employers will use in 2011.

Withholding and adjustments

It is the responsibility of employers and payroll companies to handle the new payroll tax cut under the 2010 Tax Relief Act.  Employees do not have to take any action regarding the payroll tax cut. For example, employees will not need to complete a new W-4 withholding form.

Employers should begin to use the new withholding tables released by the IRS (2011 Percentage Method Tables) to implement the 4.2 percent employee tax rate as soon as possible and, in any event, no later than January 31, 2011.

After implementing the new 4.2 percent rate, employers will need to make any offsetting adjustments to subsequent pay periods in order to correct for any over-withholding.  For any Social Security tax that is over-withheld in January, an offsetting adjustment to an employee's pay should be made as soon as possible, but no later than March 31, 2011, the IRS advises.

Self-employed individuals

Self-employed individuals would pay 10.4 percent on self-employment income up to the threshold.  Under the 2010 Tax Relief Act, self-employed persons would calculate the deduction for employment taxes without regard to the temporary rate reduction (that is, one half of 15.3 percent of self-employment income).  On the other hand, however, the new law provides an enhanced percentage representing the employer portion of the reduction.


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