The New Social Security Tax Break for 2011

The New Social Security Tax Break for 2011

Dec 19, 2010Bambi Hokanson

The new Social Security tax break for 2011 will result in more take-home pay for many American workers.

In January 2011, the new Social Security tax break law goes into effect. This tax break became a law on December 17, 2010 when President Obama signed an extensive package of tax cuts. It will lower the amount of money the workforce pays into Social Security in 2011, which will result in more take-home pay for lots of workers.

Social Security Tax Rate Change

Employees usually pay 6.2% of their initial $106,800 yearly earned wages into Social Security, but with the new tax break law passed by the House, starting in 2011 the amount will change. With the Social Security tax rate change, only 4.2% of employee’s incomes will go to Social Security. This means for each $100 in wages, workers will pay $4.20 instead of $6.20.

IRS Issues Guidance on Adjusting Payroll Systems

Employers will generally require several weeks to program and adjust their new payroll systems. The IRS just barely issued guidance on Friday because Congress waited until the very last second to deliver a determination on the tax policy for 2011. It could take a few weeks or even a couple months for the changes and credits of the Social Security tax cuts to show up on paychecks.

The Effects of the New Social Security Tax Break

After the payroll systems are adjusted, many workers will see a few hundred to a couple thousand more dollars added to their annual income. The amount employees will receive depends entirely on whether they qualified for the soon to expire Making Work Pay Credit; this credit allowed for up to $400 to any employee earning less than $75,000 or up to $800 for employed couples making less than $150,000.

• Workers who earn $50,000 annually will recognize an increase of $1,000 or $600 more than the Making Work Pay Credit and for a couple at that income level, it will mean an additional $200 more than their Making Work Pay Credit.
• Individuals who make $100,000 and didn’t qualify for Making Work Pay will notice a yearly $2,000 increase in pay; however, couples of the same income who did qualify can expect a $1,200 income boost to the Making Work pay received.
• Those earning under $20,000 or couples earning under $40,000 may realize a decrease of about $210 in take-home pay in 2011. The reason is, the new Social Security tax break will be worth less than the Making Work Pay credit was.

The New Social Security tax break for 2011 will have no effect on worker’s potential Social Security benefits, as they will still be based on their lifetime income. The tax cut really will lower the amount of money the workforce pays into Social Security in 2011 and will result in more take-home pay for lots of workers.

Read more at Suite101: The New Social Security Tax Break for 2011

Employee Paycheck Withholding

May 27, 2010Grace Ferguson

Employee Paycheck Withholding - dleafy

A look at the different withholding that occurs on employees' paychecks. ial security, Medicare, and unemployment benefits plus other smaller retirement plans, accounted for approximately $870 billion in federal revenue. The employer must withhold applicable payroll taxes from employees’ wages.

Types of Employee Paycheck Withholding

Employers are required by law to withhold federal income tax, Medicare and social security taxes, and in most cases, state income tax. Medicare and social security taxes are collected under the authority of the Federal Insurance Contributions Act, hence FICA taxes.

Purpose of Employee Paycheck Withholding

The government uses federal income tax withholding to fund national programs, such as defense and law enforcement, according to the IRS. State income tax withholding funds the state’s public system. This includes funding for state unemployment benefits, and for public schools, corrections and rehabilitation programs and environmental protection.

Medicare tax withholding provides medical benefits to eligible employees and retirees and their spouses upon reaching age 65. Social security tax is also called OASDI (Old-Age, Survivors, and Disability Insurance). Social security tax provides disabled individuals and retirees and their beneficiaries with retirement benefits.

FIT Employee Paycheck Withholding

The amount of federal income tax (FIT) the employee pays depends on his filing status, number of exemptions and the IRS’ withholding tax tables. Typically, the more allowances the employee claims, the less federal income taxes he pays.

The IRS Circular E contains the withholding tax tables. The employer should use the Circular E relevant the tax year when figuring the tax. Payroll software has the withholding tax tables hard-coded in the system. It calculates the tax based on the W-4 data (filing status and allowances) inputted in the system.

The employer can determine the federal income tax manually using either the Circular E’s wage bracket method or the percentage alternative. Use the wage bracket alternative when the employee has fewer than 10 allowances and his income does not exceed the wage limit. Use the percentage in any situation.

FICA Employee Paycheck Withholding

Employers are required to withhold Medicare tax at 1.45% of all gross wages. The employer pays a matching amount. Social security tax is withheld at 6.2% of the employee’s gross income, until she has reached the yearly wage limit of $106,800. The employer also pays a matching amount.

State Employee Paycheck Withholding

The employer should withhold state income tax from the employee’s paycheck only if the state charges the tax. The following states do not charge state income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Texas, Tennessee, Washington and Wyoming. When applicable, use the state withholding tax tables and the employee’s filing status and number of allowances stated on his state income tax form to determine the withholding amount.