2011 Employee 2% Payroll Tax Cut Holiday For Social Security and Medicare. Making Work Pay Credit Not Extended

As part of bush-era tax cuts extension legislation (Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010), a number of new tax breaks were made available. One was a temporary one year cut in employee payroll taxes, which funds Social Security and Medicare, of 2% during 2011. The current rate is 6.2%, which will be 4.2% of wages paid next year, and equates to a $1000 saving for the average American employee.  Employers and payroll companies will typically handle the withholding changes, so workers shouldn’t need to take any additional action, such as filling out a new W-4 withholding form. Employers have until January 31, 2011 to implement the new payroll tax rates, and make any necessary adjustments or corrections by March 31, 2011.
The payroll tax break, which in essence is another economic stimulus payment, has been provided to help workers and spur business hiring.  The employer tax rate for social security remains unchanged at 6.2%. The 2011 social security wage base limit is $106,800. In 2011, the Medicare tax rate is 1.45% each for employers and employees, also unchanged from 2010. There is no wage base limit for Medicare tax. The reduced Social Security withholding as a result of the payroll tax cut will have no effect on the employee’s future Social Security benefits.
Further, the Making Work Pay tax credit expires on December 31, 2010. As a result:
-  The income tax withholding tables for 2011 will no longer be adjusted for the Making Work Pay credit.
- There is no longer an optional additional withholding adjustment for pensions.
- The procedure for withholding on wages of nonresident aliens has been modified
The IRS has also released instructions to help employers implement the 2011 cut in payroll taxes, along with new income-tax withholding tables that employers will use during 2011. The IRS will also publish the official 2011 Federal tax rates and brackets in a few days which incorporates the above changes and encourage you to subscribe (free) to get the latest news.