As payroll and accounting personnel return to work in the new year, they will be hit by a less-than-appealing task: changing payroll tax withholding to account for recent United States tax law changes.
With the exception of companies where payroll professionals worked in the week leading up to and after Christmas, most companies still must implement a two percentage point reduction in employee Social Security tax withholding for 2011.
Employee-Side Payroll Tax Cut Deadline – 2011 Social Security Taxes Set at 4.2% by 1/31/11
The employee portion of Social Security taxes will be 4.2% in 2011 (instead of 6.2%). Employers must make changes in their payroll systems to accommodate this new tax rate.
To facilitate this change, the IRS released new income tax withholding tables in mid-December. However, due to the last-minute nature of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, the IRS has granted employers a one-month grace period to make necessary changes.
Even though the new withholding tax regime is in effect as of January 1, 2011, employers have until January 31, 2011 to update their systems to use the new withholding tables. Any extra amounts withheld in January due to late implementation must be reimbursed through employee paycheck(s) by March 31, 2011.
New 2011 Employee Withholding Tables & Other Guidance – IRS Publication 15, Notice 1036
IRS Notice 1036 (revised in December 2010) contains pertinent information for employers to review. It lists updated 2011 percentage method withholding tables and other information needed to implement these tax law changes. Publication 15 (Circular E), Employers Tax Guide, contains information for employers who need other wage bracket tables.
Here are links to both of those documents on the IRS website:
Payroll Tax Withholding Adjustments – 2010 Tax Bill Changes Prompt New 2011 Forms W-4As employees begin examining the tax impact of the 2% Social Security tax cut on their 2011 finances, some will submit new W-4 forms. Employers should make these changes along with any payroll tax holiday systems implementation to ensure proper withholding for employees throughout the tax year.
Payroll Tax Holiday One of Many Tax Breaks in H.R. 4853
The 2011 payroll tax holiday is just one of many exciting provisions of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. Among other provisions, that bill also extended Bush-era tax rate cuts and certain tax credits. You can read more about the 2010 tax extenders bill and the Bush tax cuts in the following articles:
Obama Signs 2010 Tax Bill Into Law – Tax Cuts Extended Until 2012 – Find out what tax rates to expect through the end of 2012 and learn about select tax breaks extended by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.
Bush Tax Cuts Expiring – 2010 IRS Tax Break Expiration Looming – Learn about important tax provisions included in the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003, the two pieces of legislation that contain tax breaks collectively referred to as the “Bush tax cuts.”
Sources:
Payroll Tax Cut to Boost Take-Home Pay for Most Workers; New Withholding Details Now Available. Retrieved from irs.gov on December 21, 2010.
Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (H.R. 4853). Retrieved from the Library of Congress website on December 17, 2010.
Related articles:
2011 Payroll Tax Holiday: Who Won't Get a Social Security Tax Cut?
2011 W-4 Form for Changing IRS Withholding Tax
Lena Gott - Lena Gott is a Certified Public Accountant who gives practical financial advice to her readers.
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