Straight from the IRS – Social Security Tax Reduced to 4.2%

12/17/2010

I just received the following email which is of interest to ALL employers and payroll personnel.

Payroll Tax Cut to Boots Take-Home Pay for Most Workers; New Withholding Details Now Available on IRS.gov

payroll taxes cut 2%WASHINGTON – The Internal Revenue Service today released instruction to help employers implement the 2011 cut in payroll taxes, along with the new income-tax withholding tables that employers will use during 2011.

Millions of workers will see their take-home pay rise during 2011 because the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 provides a two (2) percentage point payroll tax cut for employees, reducing their Social Security (FICA) tax withholding rate from 6.2% to 4.2% of wages paid.  This reduced Social Security withholding will have no effect on the employee’s future Social Security benefits.

The new law also maintains the income-tax rates that have been in effect in recent years.

Employers should start using the new withholding tables and reducing the amount of Social Security tax withheld as soon as possible in 2011 but not later than January 31, 2011. IRS Notice 1036, released today, contains the percentage method income tax withholding tables, the lower Social Security withholding rate, and related information that most employers need to implement these changes.  Publication 15, (Circular E), Employer’s Tax Guide, containing the extensive wage bracket tables that some employers use, will be available on https://www.irs.gov in a few days.

The IRS recognizes that the late enactment of these changes makes it difficult for many employers to quickly update their withholding systems.  For that reason, the agency asks employers to adjust their payroll systems as soon as possible, but not later than January 31, 2010.

For any Social Security tax over withheld during January, employers should make an offsetting adjustment in worker’s pay as soon as possible but NOT later than March 31, 2011.

Employers and payroll companies will handle the withholding changes, so workers typically won’t need to take any additional action, such as filling out a new W-4 withholding form.

As always, however, the IRS urges workers to review their withholding every year and, if necessary, fill out a new W-4 and give it to their employer.  For example, individuals and couples with multiple jobs, people who are having children, getting married, getting divorced or buying a home, and those who typically wind up with a balance due or a large refund at the end of the year may want to consider submitting revised W-4 forms.  IRS Publication 919, How Do I Adjust My Tax Withholding?, provides more information to workers on making changes to their tax withholding.

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For those of using an Intuit/QuickBooks Payroll Subscription – DON’T PANIC – Intuit will revise our payroll software to include these new changes and will release the changes through a payroll update.  Just don’t expect it to be available on January 1, 2011, as they will having to make the coding changes – and that isn’t as easy as one might think.  Intuit is already aware of this, see an article on their Payroll Support website.

Notice 1036 indicates that ONLY the employee Social Security (FICA) percentage is being reduced to 4.2% – employers will still contribute 6.2%.

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12/28/2010 an update:

It is my understanding that Intuit will be releasing payroll update 21102 beginning today – December 28, 2010 – you’ll just need to download the update.   This update includes modifications to the Federal withholding tables, the Nonresident Alien withholding tables, and the reduction of the Social Security withholding tax rate to 4.2% (employee portion).  This change will ONLY be effective for paychecks dated AFTER 1/1/2011 – paychecks dated BEFORE 12/31/10 will reflect the standard 6.2% employer & employee contributions.

Other key things that will take place:

I would like to thank Yvonne Leiser, CMA for the following information:

Please be aware that employees making LESS THAN $20,000 per year will see a DECREASE in their take home pay.

Making Work Pay gave each worker a $400 reduction in taxes on their first $6,452 of wages. This ended at the end of 2010. It has been replaced with a 2% reduction in Social Security Taxes. Unfortunately, workers earning less than $20,000 will see a DECREASE in their take home pay.

11 thoughts on “Straight from the IRS – Social Security Tax Reduced to 4.2%

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  • Rick, really there is a lot more involved than what you might think. Before I became a software developer, I used to think that things like that should be so simple – a slam dunk if you please. But going in an making a change from 6.2 to 4.2 is only the beginning. These changes flow through into the 941’s as well and depending on “how” the code was written to begin with – well it might be a big coding change. Then of course, there is testing and debugging!

  • Rick

    “The IRS recognizes that the late enactment of these changes makes it difficult for many employers to quickly update their withholding systems”

    Yes, I know this is true. But I never understood it. I do payroll using Quickbooks and simply get updates from them, download it, and I’m all set. I would think with the sophisticated computer programming out there these days, this kind of change could be done in a matter of seconds – change “6.2” to “4.2” in the program! I would imagine the payroll processing giants like Paychex and ADP would be able to make that change just as easily as Quickbooks does. A no brainer. But it doesn’t seem to be the case for some reason. It’s a mystery to me.

  • Hi Deborah,
    Well I have to admit, the only error is that it should say January 31, 2011 (sorry that was a typo on my part – it’s difficult to be a year ahead of myself), other than that this came straight from the email that I received.

  • Deborah

    Is this an error?
    The IRS recognizes that the late enactment of these changes makes it difficult for many employers to quickly update their withholding systems. For that reason, the agency asks employers to adjust their payroll systems as soon as possible, but not later than January 31, 2010.

  • Rick
    Notice 1036 indicates that ONLY the employee Social Security (FICA) percentage is being reduced to 4.2% – employers will still contribute 6.2%.
    As for what the IRS means about “This reduced Social Security withholding will have no effect on the employee’s future Social Security benefits” means – I wouldn’t dare to even hazard a guess as to exactly what the IRS means by that statement.
    Look for much confusion and additional information in the days to come.

  • Rick

    If they are reducing the employee portion to 4.2%, does that mean the employer portion will go up to 8.2% to make up for it? Otherwise how can it be that “This reduced Social Security withholding will have no effect on the employee’s future Social Security benefits”?

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