Does Your Paycheck Seem a Little Larger?

That is the result of a new stimulus provision included in tax legislation passed late in December last year that takes the place of the Making Work Pay credit that expired at the end of 2010.

This new provision reduces employees’ Social Security (OASDI) payroll tax withholding by a full 2 percentage points from 6.2 percent to 4.2 percent of wages paid. The reduction applies to all wage earners regardless of income. The employer’s share of the payroll tax is unaffected. For wage earners with payrolls in excess of the $106,800 payroll tax cap, their savings for 2011 will be $2,136 (2% of $106,800). The OASDI portion of the self-employed (SE) tax for self-employed individuals would also be reduced by 2 percentage points, reducing the overall SE tax from 15.3% to 13.3%. This reduced Social Security withholding will have no effect on an individual’s future Social Security benefits.

There is a potential tax trap for some individuals with multiple jobs if the income from these jobs exceeds the $106,800 payroll tax cap. These individuals will have too much withheld in the way of payroll tax, which is returned to them as a credit on their tax return for the year. Some may have become accustomed to utilizing the excess payroll tax to offset the tax on other income or to increase their refunds for the year. If this applies to you, keep in mind that you will have already received part of the expected overpayment in the form of reduced withholding during the year.

Without further Congressional action, the rates will return to normal in 2012, at which time the withholding tax will increase and take-home pay will be correspondingly reduced.

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