Human Resources News & Insights

New tax law means bigger paychecks in ’11

A new law officially extends the holiday season — all year — by reducing the amount of Social Security taxes people will pay next year.

Employees of all income levels will enjoy a “payroll tax holiday” in 2011, when the Social Security tax rate for employees falls from 6.2% to 4.2%. Employers will continue paying 6.2%.

The taxable wage base remains $106,800, which means the maximum taken out for 2011 will be $4,485.60. That’s compared with $6,621.60 in 2010.

So, someone earning that amount or greater will save roughly $2,136 in taxes. An average worker — say someone earning between $35,000 and $64,000 — will find about $613 more in his or her pay in 2011 than 2010, according to an analysis by the Tax Policy Center.

The Social Security tax holiday’s just one piece of the Tax Relief Unemployment Insurance Reauthorization and Job Creation Act Of 2010 that President Obama signed into law on Dec. 17.  Here are some other specifics affecting Payroll – and the size of workers’ paychecks:

Current tax brackets extended

The Bush-era tax cuts, which were set to expire on Dec. 31, are extended another two years. The income tax rates remain:

  • 25%
  • 28%
  • 33%, and
  • 35%.

Employer-provided educational assistance continued

In 2011 and 2012, employers will be able to offer employees up to $5,250 annually in employer-provided educational assistance for undergraduate and graduate courses.  The amounts are excludable for income and employment tax purposes.

Adoption assistance renewed

Employers can continue giving employees tax-free adoption assistance through 2012. The credit and exclusion from income is, per eligible child, a maximum of:

  • 2011 – $13,360, and
  • 2012 – $12,170.

These amounts are indexed annually for inflation.

Parity for transportation fringes maintained

Employer-provided, qualified transportation benefits, such as parking, transit passes, vanpool benefits and qualified bicycle commuting reimbursements, will maintain tax parity.

The American Recovery and Reinvestment Act of 2009 (ARRA) increased the monthly exclusion for employer-provided vanpool and transit pass benefits to the same level as the exclusion for employer-provided parking ($230 for 2010).

The ARRA limits were to expire Dec. 31. The provision extends the parity through 2011.

Note: Congress didn’t extend the Making Work Pay tax credit, which “refunded” money to workers through lower federal tax tables. That worked out to roughly $400 per employee annually. While workers won’t see that reduction this year, many will get even larger “refunds” thanks to the payroll tax holiday.

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  • Andrea Rudman

    The “larger paycheck” concept is a JOKE!! I do payroll. I got the new FICA rates and then tested it using my paycheck. It resulted in an increase of $16.00. I was going to increase my 401K contribution. THEN…I get the new tax schedules from the IRS. I redo the calculations and get the
    new check amount resulting in an increase of….wait for it……..$1.42!! I’ll try not to spend it all in one place.

  • Martin

    This is nonsense – It is all offset by the increase in costs for goods due to the monetizing of the debt….so bottom line is we are no better off.
    Gas will be up to $3.75 or more this Spring because we are no longer competitive anywhere in the world and we have failed repeatedly to secure our own natural resources due to unfounded environmental concerns……this is a big hoax…..
    The usual media types refer to this as a “tax cut” when in fact it is the status quo ruined by the printing of paper money…get your wheelbarrows oiled up…..Weimar Republic coming our way…..

  • HA

    Joke is right. I am a state employee and for some reason since I don’t pay into ss (remind you when I retire I will not be eligible for ss) .. I get a tax increase. My check will now be $21 less per pay ($546/yr) in addition to the $60 less a pay ($1,560/yr) I have been losing to mandatory “cost savings days” issued by our governor going on two years now. Amazing, I still pay the gas and other day to day living expense increases the same as the next person. I am not asking for a pay increase. I am fine with the pay freeze (and understand it) that has been issued to us state employees, but to keep decreasing our pays? Our bills aren’t decreasing. And to find out our new govenor is hiring his staff at $40,000/person more than the last and is wanting to increase our mandatory “cost savings days” by an addition 10 days…thats double of what we are doing now.
    And who again is benefitting from this?