The first paychecks of 2011 are being prepared. Or maybe you've already gotten one.
You might be in for a surprise.
Despite all the talk about the 2 percent payroll tax cut that's in effect this year, including by me here on Bankrate's Taxes Blog, some folks won't get any benefit from the new law. In fact, they could pay a bit more in withholding in 2011.
The problem is that old law of unintended consequences. In this case, we have the Making Work Pay tax credit, which expired in 2010, and the new payroll tax cut from 6.2 percent to 4.2 percent colliding.
The bottom line is that people who don't earn much will end up getting nothing from the payroll tax reduction.
Here's the deal.
If you worked last year, the Making Work Pay credit afforded you up to $400 in extra income last year. A married couple filing jointly got a possible $800 bonus. Although the credit was accounted for in your 2010 paychecks via reduced withholding then, you'll actually claim it when you file your tax return this year.
Once a worker starts making more than $20,000 or $40,000 if married, then the bonus of the payroll tax cut will be felt.
So single workers making less than $20,000 and couples earning less than $40,000 actually will receive less from the payroll-tax cut than they did from the Making Work Pay credit.
And remember all that talk about tax breaks for the rich that preceded the law change creating the payroll tax cut? Those wealthy workers are the ones who are going to really benefit from this new law.
An extra 2 percent in pay for a worker making $50,000 comes to $1,000, much more than the $400 available via the Making Work Pay credit.
The news is even better for those making more. The payroll tax cut applies on earnings up to $106,800. That's the Social Security wage base limit, the top amount at which payroll taxes to pay for that government benefit are withheld. If you make more than that, you don't pay any taxes into Social Security out of your income above that threshold.
Someone making $106,800 this year will get $2,136 more in pay. If a husband and wife each makes that much, they get double the tax break with the payroll tax cut. It makes the Making Work Pay amounts look paltry, doesn't it?
Even better: High earners don't have to worry now about the income limits that applied to the Making Work Pay credit. Last year's tax break was reduced for single taxpayers with modified adjusted gross income between $75,000 and $95,000 and for joint filers with earnings between $150,000 and $190,000.
And around 6 million workers employed by Uncle Sam and state and local governments won't get any payroll tax relief because they don't contribute to the Social Security system.
So for some, the payroll tax cut isn't a tax break at all. For others, it's a much more generous tax benefit. As the old saying goes, life (and taxes) just ain't fair.
Make sure you get all the latest tax news and tips this filing season by subscribing to Bankrate's free Daily Tax Tip newsletter.