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:
- 33%, and
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.