On Dec. 17, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, a broad piece of legislation that addresses a slew of tax issues, many that affect HR.
The centerpiece of the legislation—an across-the-board extension of the “Bush tax cuts” enacted in 2001—means employers won’t have to adjust federal tax withholding on employee paychecks.
Those tax rates were scheduled to expire on Dec. 31, 2010. Without the law, the average employee would have paid about $3,000 more in federal income taxes next year.
Note: Employers don’t have to take any action as a result of the extension of current tax rates.
A break on Social Security taxes
However, another part of the new law means that most employees will see their take-home pay increase in 2011. The law created a one-year “payroll tax holiday” by lowering employees’ share of Social Security withholding to 4.2%.
The 2011 Social Security tax had been pegged at 6.2%, which means an employee earning $50,000 will now save $1,000.
Note: Consult your payroll provider or your accounting staff to find out how soon employees will start seeing more money in the pay envelopes.
Because the new law was enacted so late in the year, it may take a couple of payroll cycles for the new Social Security tax to show up. Providers and accountants need time to input the new rates into their payroll software programs.
“It could be the third paycheck of the year before [employees] see a ‘normal’ check,” Scott Mezistrano, senior manager of government relations of the American Payroll Association, told CNNMoney.com.
Other changes affecting HR
Tuition reimbursement: The new law also extended tax breaks for employer-paid tuition reimbursement. Employees can continue to receive up to $5,250 tax-free from an employer plan to pay for qualified higher-education expenses, including graduate school tuition. Employers can take a full deduction for those payments.
This tax exclusion was scheduled to expire after 2010. The new law extends it through 2012.
Commuter benefits: The law extends tax-free commuting benefits designed to encourage employees to use mass transit to get to work. The maximum benefit for monthly transit passes was recently increased from $120 to $230 for the 2010 tax year, and the new law preserves that amount through the end of 2011. Without the change, the maximum monthly benefit would have dropped back to $120.
Note: The same benefit can also pay for van pooling and employer-provided parking.
On-site child care: The new law extends a 25% tax credit employers may take for qualified expenses (up to $100,000 per year) related to providing child-care facilities to employees. An extra 10% credit is allowed for child-care resource and referral services.
The new law extends this tax credit for two more years through 2012.
Incentives for hiring disadvantaged workers: An employer may qualify for the Work Opportunity Tax Credit (WOTC) if it hires qualified workers from certain target groups. The WOTC was scheduled to expire after Aug. 31, 2011. In a pre-emptive move, the law extended the credit through Dec. 31, 2011.
The WOTC is generally equal to 40% of the first $6,000 of the worker's first-year wages.
Note: Recent tax legislation added unemployed veterans and “disconnected youth” to the list of target groups.
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