With the New Year, businesses began adhering to a new withholding schedule for employee’s wages that replicates a cut in federal payroll taxes for 2011.

In an effort to motivate spending and increase take-home pay, this law gives a two percentage point payroll tax cut for employees through 2011. This change was part of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. As a result, millions of workers will see an increase in the money they bring home this year.

 

The Internal Revenue Service realizes businesses did not have much time to implement the changes (which were released in December 2010), so it asks employers to adjust their payroll systems to the new Federal withholding tables by January 31.

 

The IRS advises Social Security taxes over-withheld during the month of January to be adjusted in employee pay as soon as possible—but by no later than March 31, 2011. 

 

As part of this new law, Social Security tax withholding rates for employees dropped from 6.2 percent (in 2010) to 4.2 percent (in 2011). Employer portions of the Social Security payroll tax will remain at 6.2 percent of specified wages. Future employee Social Security benefits will not be impacted by the change.

It’s also important to note that employees will typically not need to take additional action to take advantage of the reduced withholding (such as filling out a new W-4 withholding form).

 

Please visit the IRS page for additional information from the IRS on this important topic.