Payroll Tax Cut in the 2010 Tax Relief Act

The biggest new tax break for individuals in the recently enacted “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010” is the one-year payroll tax reduction. Under this new provision, which is intended to supplement income and boost economic growth, the payroll tax—which funds Social Security—will be cut by two percentage points during 2011. Here are the details:

  • The Social Security payroll tax on individual wages is lowered to 4.2% in 2011, from the usual 6.2% rate. For an individual with wages of $60,000, that amounts to a $1,200 savings. If the individual gets paid twice a month, it will mean an extra $50 in each paycheck.
  • Self-employed workers also get the tax break. Their self-employment taxes have been cut from 12.4% to 10.4%.
  • There is no phaseout (i.e., gradual reduction) of the payroll tax reduction for higher income workers. It goes to everyone who works, regardless of income. However, since Social Security taxes apply only to the first $106,800 in earnings in 2011, the benefit for high earners tops out at $2,136.
  • The payroll tax reduction in effect replaces the $400-per-worker tax break included in the 2009 stimulus bill. That break, called the Making Work Pay tax credit, provided a tax credit of 6.2% on the first $6,450 of a worker’s wages but was phased out for workers making more than $75,000 ($150,000 for couples). The Making Work Pay credit amounted to a maximum of $400 for individuals, $800 for couples. The new law’s payroll tax reduction, by contrast, provides a potentially much bigger tax break for taxpayers (up to $2,136 for individuals, $4,272 for couples). In addition, the benefits of the payroll tax reduction are distributed far differently than they were under the Making Work Pay credit, which was aimed primarily at low and moderate-income workers.
  • The employer’s share of Social Security tax is not affected; it stays at 6.2%. Thus, the cost of hiring new workers isn’t directly affected by the payroll tax reduction.
  • The tax break applies only for one year, 2011, for now. There will almost certainly be efforts to extend it beyond 2011, and I will keep you apprised of any developments in that regard.
  • The payroll tax reduction will not affect the worker’s future Social Security benefit, because benefits are based on lifetime earnings, not the amount of tax paid by the worker into the Social Security system.

I hope this information is helpful. If you would like more details about the payroll tax reduction or any other aspect of the new law, please do not hesitate to call your Contryman professional.

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