ALERT - Wage Tax Holiday For Workers In 2011Print PDFShare
What The Law Does
In December, 2010, the President signed into law H.R. 4853, the Tax Relief Unemployment Insurance Reauthorization and Job Creation Act of 2010 (P.L. 111-312), which contains a special gift for all workers in the new year. The law provides for a temporary reduction of two percentage points in the payroll tax rate for employees and the self-employed (independent contractors) in 2011. As a result, the Social Security payroll tax is 4.2% for employees and 10.4% for the self-employed in 2011. The law makes no change to the Social Security payroll tax rate for employers (6.2%) or to the amount of wages and net self-employment income subject to the payroll tax ($106,800 in 2011). To protect the Social Security Trust Fund from a loss of revenues resulting from a temporary reductions in the payroll tax rate for employees and the self-employed, the law appropriates to the Social Security Trust Fund amounts equal to the reduction in revenues to the Treasury. The temporary reduction of payroll taxes for workers will expire on December 31, 2011.
The Social Security Program is financed primarily by revenues from the Federal Insurance Contributions Act (“FICA”) taxes and Self-Employment Contributions Act (“SECA”) taxes. The FICA tax rate of 7.65% for employers and employees has two components: 6.2% for Social Security and 1.45% for Medicare hospital insurance. There is a wage base limit for the Social Security tax but there is no wage base cap for the Medicare tax. Normally, employers and employees would each pay 6.2% of wages up to $106,800 in Social Security payroll taxes, except for the special temporary 2% reduction applicable to the worker portion in 2011. The FICA taxes are paid on a regular basis throughout the year (for example, weekly, monthly, quarter, or annually). The SECA tax rate is 15.3% for self-employed individuals with 12.4% for Social Security but reduced to 10.4% by the temporary wage reduction for 2011 and 2.9% for Medicare hospital insurance. In 2011, self-employed individuals pay the SECA on self-employment income up to $106,800 in Social Security payroll taxes with one-half of the SECA allowed as a deduction for Federal income tax purposes. SECA taxes are normally paid once a year as part of a filing of an annual individual income tax return.
The IRS discussed the new payroll tax holiday for the reduced employee's tax rate for Social Security taxes in IRS Notice 1036, "Early Release Copies of the 2011 Percentage Method Tables for Income Tax Withholding," carrying 2011 percentage method tables for income tax withholding that reflect the 2010 tax change. This Notice explains that employers should implement the 4.2% employee Social Security tax rate and new withholding tables as soon as possible, but not later than January 31, 2011. Employers should use 2010 withholding tables until 2011 tables are implemented. To correct over-withholding if the new 4.2% rate is not implemented by January 1, employers should make an offsetting adjustment in subsequent pay period to correct any over withholding of Social Security tax as soon as possible, but not later than March 31, 2011.
The tax savings from the wage tax holiday are not insubstantial to the estimated 73 million workers affected. For example, the tax cuts at various income levels are set forth below:
Annual Income = Increase in Take Home Pay Per Year
$20,000 = $400
$50,000 = $1,000
$100,000 = $2,000
The maximum benefit will be $2,136 for a worker earning more than $106,800, the maximum subject to FICA tax. The temporary wage reduction will impact workers and employers. Workers will have an immediate tax decrease with their first wages in 2011. They will want to adjust their tax withholdings and determine how to use the extra revenues. Employers will have to work closely with their payroll companies to ensure the proper adjustments are made to their employees' pay checks in the new year.1
For more information, please contact Jerry Geis at 651-808-6409 or e-mail.
1The text of Notice 1036 can be found by going to the IRS website at: http://www.irs.gov and typing in "Notice 1036" in the search engine.