One Year Payroll Tax Reduction

The biggest new tax break for individuals in the recently enacted “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010” is the one-year payroll tax reduction.  Under this new provision the payroll tax will be cut by two percentage points during 2011.

This newly enacted legislation will affect payroll checks issued beginning January 1, 2011 and ending December 31, 2011. If you have not already contacted your payroll provider regarding this change for 2011, we recommend you do so immediately.  

Important details to note:

  • The Social Security payroll tax withholding on individual wages will be lowered to 4.2% in 2011, from the usual 6.2% rate.
  • The employer’s share of Social Security tax is not affected; it stays at 6.2%.

Additional information to note:

  • Self-employed workers will also get the tax break. Their self-employment taxes will be cut from 12.4% to 10.4%.
  • There is no phase-out (i.e., gradual reduction) of the payroll tax reduction for higher income workers. It goes to everyone who works, regardless of income. However, since Social Security taxes apply only to the first $106,800 in earnings in 2011, the benefit for high earners tops out at $2,136.
  • The tax break only applies for one year, 2011—for now anyway. There will almost certainly be efforts to extend it beyond 2011, and we will keep you apprised of any developments in that regard.
  • The payroll tax reduction will not affect the worker’s future Social Security benefit, because benefits are based on lifetime earnings, not the amount of tax paid by the worker into the Social Security System.

If you would like more details about the payroll tax reduction or any other aspect of the new law, please do not hesitate to call.

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