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Tax law means bigger 2011 paychecks

By Kay Bell ·
Tuesday, December 21, 2010
Posted: 12 pm ET

Not so long ago when it looked like the Bush tax cuts might expire, we were all worrying about the possibility of shrinking paychecks.

Now we're worrying if our employers can get the new withholding tables in place to make sure our paydays will be bigger.

A 2 percent payroll tax cut is part of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. The payroll tax is the portion that goes to pay for Social Security.

For the next few days, that withholding is 6.2 percent of your paycheck.

But on Jan. 1, 2011, the amount withheld drops to 4.2 percent of your income earned next year, up to $106,800. If you make up to that taxable earnings cap, this 2 percent reduction translates into tax savings of $2,136.

Of course, since Congress took so long to pass the tax relief act, the Internal Revenue Service and employers are in a bit of tough spot in implementing the changes.

The IRS just issued new withholding tables reflecting not only the payroll tax cut, but also the newly extended 2011 income tax rates and the previously scheduled expiration of the Making Work Pay tax credit. (Remember, this tax credit is still in effect for 2010, so you can claim it on your returns you'll file next year.)

That's a lot of changing numbers, but now all employers have to do is put the new tables in place. But, as any payroll administrator will tell you, that's easier said than done.

So the IRS is giving workplaces some time to take care of the new withholding. The agency has instructed employers to implement them "as soon as possible in 2011 but not later than Jan. 31, 2011."

And if an employer does end up withholding the payroll tax from workers at the higher 6.2 percent rate, the IRS says the employers must reimburse the workers the difference "not later than March 31, 2011."

So be sure to check your first paycheck next month and if you have any questions about the amount, check with your boss about whether (or when) the new, lower payroll withholding tax is in place.

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January 18, 2011 at 6:39 pm

I would not be in a rush to spend any "new-found" wealth. What the government giveth - the government taketh away.
Too often, these situations end up being treated like a loan.
It reminds me of the dot-com era on a smaller scale(?)

Kaye Nagell
January 18, 2011 at 4:08 pm

This article makes it sound like less tax will be withheld. But the federal tax taken out of my husbands paycheck has increased by 1/3. Any idea why?

January 17, 2011 at 4:44 pm

Isn't payroll tax really social security - a system supposedly in jeopardy because it doesn't collect money? Is there something wrong with this picture? Shouldn't we be trying to collect as much as we spend rather than lowering the amount collected and having to borrow to make it up the difference?

January 12, 2011 at 8:39 pm

No bigger paychecks in Illinois...Thanks Governor Quinn and all the Democrats in Springfield!

January 12, 2011 at 1:53 pm

I never did understand why social security was capped at about $106K in salary. For my husbands paycheck starting in October, it meant he no longer had social security taken out, giving us about $300 more in paycheck. It was nice I admit, and surprised the heck out of me when it first happened...why doesn't his payroll average out social security so he pays evenly all year, I don't know. But now his social security burden is even less (why?), saving us an extra $100 in his check already. We can certainly use that money and it isn't so we can take vacations or drive fancy bills, braces, college costs and more. If they decide that there would be no more cap, I might grumble a little, but I would understand it as social security obviously needs help.