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Tax law means bigger 2011 paychecks

By Kay Bell · Bankrate.com
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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17 Comments
Christopher
January 10, 2011 at 9:16 pm

My paycheck was smaller by 14.99 Jan 5th for me who is at 35k it did not yet include the new social security discount. but either way its a great first step to removing social security all together. if you can't plan for your retirement no offence but your a idiot i have been putting 10% of my income away since i was 18 and made a lot of sacrifices in order to do it. But i will have a paid for retirement without taxing the younger generations for it.

Karen
January 09, 2011 at 2:11 pm

What an insane idea, to cut FICA taxes when social security is in trouble to begin with. I make close to the FICA maximum so it is a noticeable increase in my paycheck, but I would gladly give it up if it ensures the future viability of SS (I am about 20 years away from retirement).

And note, it's not a 2% reduction -- it's a 2-percentage-point reduction. In percentage terms, it's about a 35% reduction -- i.e., moving from 6.2% to 4.2% is a 35% reduction in the tax (the 2.2 difference divided by the starting number, 6.2). To say it's a 2% reduction understates the magnitude of the reduction. (Sorry to be pedantic, but "percentage difference" and "percentage-point difference" don't mean the same thing. If taxes go up from 5 to 6%, that's only a 1-percentage-point increase, but a 20% increase in the rate [going from 5 to 6].)

Carol
January 07, 2011 at 9:44 am

My first 2011 paycheck is actually SMALLER! With the expiration of the Federal withholding tax cut from last year's stimulus package, less the 2% reduction in my FICA deduction, my net pay was less by 48 cents. So myuch for a bigger paycheck in 2011.

Pamela
January 04, 2011 at 5:13 pm

From what I see on my first payroll run in 2011, my employees Net is less than in 2010. In reviewing the Percentage Method Tables, the IRS has increased the withholding amounts.

For a Single person:
2010 for amount of wages after subtracting withholding allowances - over $200 - the amount is $8.40 plus 15%

2011 for amount of wages after subtracting withholding allowances - over $204 - the amount is $16.40 plus 15%

How is doubling the amount making bigger paychecks? This is moving backwards on income and my employees will be taking less home now.

I'm sure I will have some employees, that follow this, in my office wanting to know why their check is less. Making more work for me because I have to explain what our brilliant government has done.

David
January 03, 2011 at 6:29 pm

The SS "problem" is an easy fix - if we can get the politicians to grow a spine (or whatever). Take the arbitrary lid ($106,800)off of the SS tax. That way, there will be more than enough money to cover the liability in perpetuity AND permanently decrease the rate. This would help the average wage earner and also help small businesses - a win-win situation. I see no reason to keep the current system where the more you make the less the effective rate you pay. Remember, to those who much is given, much is expected. About 2000 years ago, a guy suggested that we are expected to care for those less fortunate than ourselves. This would be a good starting place.

Rusty
January 03, 2011 at 3:06 pm

When I compared this year to last year for same gross pay, the net pay difference was negligible. Why? While FICA tax came down 2%, FIT went up about .4%. 1.6% doesn't even cover inflation. So those of us not getting raises are still in agony.

So if Social Security went down, there be anything left to collect in 10 years? Sounds like a stupid place to cut. Since it is no longer considered a retirement plan but a tax, why don't they just raise the cap on Social Security to match that on Medicare? Seems more fair.

Barbara
January 03, 2011 at 10:37 am

I don't understand how we can cut the Social Security part of the FICA tax by 2%, when there is all this talk of Social Security being in jeopardy. Can anyone explain this to me?

Sam
January 01, 2011 at 11:14 am

Since I've known how to read English and internet is available, the bankrate.com is my Financial University.
Thank you.
Happy New Year.

Scott
December 22, 2010 at 12:57 pm

Can IRS cut a tax settlement plan in half due to divorce? Anybody know anything about this issue?

AngryMobVoter
December 22, 2010 at 10:07 am

From what I understand the rates on the withholding tables are actually higher that the current rates essentially negating the effect of the 2 percent payroll tax cut.