Thanks to the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (aka Tax Relief Act of 2010), which President Obama signed into law on December 17, 2010,and/or self-employment income up to $106,800 will be subject to Social Security taxes of 4.2% -- a 2% drop from the 6.2% rate that's been in effect for many years.
Here's how this new law affects employees, the self-employed, and employers.
An employee with W-2 compensation of $50,000 will see a reduction in Social Security tax withholdings of $1,000 over the course of 2011. If your W-2 compensation is $100,000, you'll get an additional $2,000 in your take-home pay. The employee Social Security tax of 4.2% applies to the first $106,800 of gross pay, so if you make more than that, your tax cut is limited to $2,136 ($106,800 x 2%).
Keep in mind that you'll get this tax cut via lower withholdings and higher net pay in each paycheck during the year. At the $50,000 annual wage level, this amounts to about $19/week.
The self-employed have the unfortunate honor of paying both the employee and employer share of Social Security taxes via self-employment tax. Normally, instead of 6.2%, you pay 12.4%. The 2011 law reduces your Social Security tax by 2%, so now you'll pay 10.4% instead of 12.4%. End result: you get the same tax break as an employee.
The employer has been required to pay 6.2% in Social Security taxes for many years, i.e. the same amount as the employee. Under the new law, only the employee's share of Social Security tax is reduced by 2%. The employer's share remains the same at 6.2%. Sorry!
But this 2011 law does affect the employer, because the employer must change the Your should take care of this, and you should begin using the new rate of 4.2% effective January 1, 2011.withholding calculations for the employee's reduced rate of 4.2%.
The IRS realizes that the late enactment of the Tax Relief Act of 2010 could make it difficult for employers to change theirso quickly. So the IRS is asking employers to adjust their as soon as possible, but not later than Jan. 31, 2011.
If an employer ends up withholding too much Social Security tax in January, the employer should make an offsetting adjustment in workers’ pay as soon as possible but no later than March 31, 2011.
- 5 Questions You Must Ask Before Hiring A Good Tax Preparer
- How to Increase Your Year-End Tax Deductions by Helping Others Over the Holidays
- How to Turn Non-Deductible Commuting Mileage Into A Deductible Business Expense
- How to Write Off Your Next Vacation
- IRS Mileage Rate Increase Puts A Few More Dollars In Your Pocket