You might have seen a slight increase in your take home pay. Where did that come from? President Obama signed the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 on December 17th. This means almost all of the bush tax cuts were extended along with some new tax changes. One of the most beneficial (direct money in the pocket) change is the 2011 Tax Holiday, which essentially cuts the social security taxes by 2%.
What is 2011 Payroll Tax holiday?
This is the 2011 version of stimulus check. The making work pay credit was not extended, instead it is replaced for 2011 with a 2% cut in social security taxes. Personally, I like this better because we never qualified for the full making work pay credit.
How does the 2011 Payroll tax Holiday work?
The FICA portion of your paycheck tax withholding also called as the payroll tax will be cut by 2% for 2011. The withholding rates for your Social Security taxes will go from 6.2% to 4.2% for the 2011 tax year. The other 1.45% of your FICA taxes go to Medicare funding, and will remain unchanged.
How much extra money does the Payroll tax holiday give me?
You will get an extra 2% (before tax) take home income. For example, if you earn $50,000 per year, in 2011, you FICA taxes will be $1000 less than last year. The maximum benefit amount will be capped at $2,136 as the social security tax itself is capped at $106,800.
| Social Security taxes | 2010 | 2011 |
|---|---|---|
Employee | 6.2% on earnings up to $106,800 | 4.2% on earnings up to $106,800 |
Employer | 6.2% on earnings up to $106,800 | 6.2% on earnings up to $106,800 |
| Self-employed *Can be offset by income tax provisions | 12.4%* on earnings up to $106,800 | 10.4%* on earnings |
| Medicare taxes | 2010 | 2011 |
Employee/employer (each) | 1.45% on all earnings | 1.45% on all earnings |
| Self-employed *Can be offset by income tax provisions | 2.9%* on all earnings | 2.9%* on all earnings |
IRS released the new withholding table on Dec 17, 2010 and asked the employers to adjust their withholding -
Employers should implement the 4.2% employee social security tax rate as soon as possible, but not later than January 31, 2011. After implementing the new 4.2% rate, employers should make an offsetting adjustment in a subsequent pay period to correct any overwithholding of social security tax as soon as possible, but not later than March 31, 2011.
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We are self-employed, so it looks like this tax holiday won’t help us at all, will it? So…in that case, I wish we were keeping the making work pay credit. Why doesn’t the tax holiday apply to self-employed workers? We are fully paying our own SS, so it would be really nice to be able to decrease that by 2%.
Stephanie, Actually it will help the self employed as well. Instead of paying 12.4% (employee portion 6.2 and employer portion 6.2, both paid by yourself as a self employed professional) you will be paying 10.4% this year (employee portion 4.2 and employer portion 6.2). Based on your income, the 2% might actually be better than making work pay credit.
Thanks so much for letting me know! That is great news
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