I rolled into work this morning along with many Americans for the first time in 2011. Since New Year’s Day fell on Saturday this year, those of us who work “traditional” hours (yes, my use of the term is cheeky) started our work year today.

It’s also the start of a bit of a headache for many tax and HR professionals. You see, this week marks the beginning of the special, one year payroll tax holiday. Holiday is a bit of a misnomer since payroll taxes will still be collected for 2011 – just at a reduced rate. On the employer side, payroll tax contributions for federal purposes will remain the same. On the employee side, payroll tax contributions for federal purposes will be reduced by 2%: instead of paying in at 6.2% for Social Security taxes (up to $106,800), contributions will be 4.2% for Social Security taxes (still up to $106,800). Contributions for Medicare remain the same and there is no cap like there is for Social Security (all wages are taxable).

The net result is that most wage earners will see more money in 2011. There is, however, an exception. Since the point of the payroll tax holiday was to replace the Making Work Pay Credit (the Making Work Pay Credit still applies for tax year 2010), there is no Making Work Pay Credit for 2011. That’s good news for those families making over $40,000 per year but not for those who make less. The Making Work Pay Credit was a flat credit ($400 for individuals and $800 for married couples) subject to certain income restrictions and phaseouts. The payroll tax holiday, in contrast, is based on a percentage. A married couple making $30,000 and filing jointly would have netted $800 in credit but under the new scheme will only save $600. It’s even more dramatic for those making less: a married couple making $20,000 and filing jointly would have netted $800 in credit but under the new scheme will only save $400.

It will be interesting to see how this pans out. I’m betting that most households won’t even notice (one of the bonuses, as Congress well knows, of a complicated and ever-changing tax structure is that many taxpayers don’t actually know how it affects them) but if they did – and if they cared – it could haunt one of the parties come 2012. The percentage of families making $40,000 or less in the US is a whopping 45%: that’s a significant voter block.

The payroll tax holiday is all part of the new tax deal. Congress and the President are hoping that most Americans will be happy with the extra pay in their checks. Are you?

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Kelly Phillips Erb is a tax attorney, tax writer, and podcaster.


  1. Does the 2% social security holiday apply to self-employed? For estimated payments, should they only plan for 13.3% for the employee & employer portion instead of the typical 15.3%?


  2. I’m also fond of ruffling some feathers by pointing out that government employees like teachers and other civil servants who don’t pay FICA don’t get this break, even though they did get the Making Work Pay Credit. At least we can all agree that there won’t be as many mistakes on people’s 1040’s!

  3. How is this going to affect sch C filers. We going to get a holiday on our Self Employment tax?

  4. 13.3% ignores the deduction for the employer side of the employment taxes on page 1 of the 1040 but essentially yes, 2% less than what you previously would have recommended as the withholding rate for employment taxes.

  5. Dependent children who work will get the 2% break. They did not qualify for the MWPC, so they will come out ahead under this scheme.

  6. There is no phase out either, right? So higher income earners will benefit even more than with the making work pay credit … a family making $100,000 will save $2,000. A family with two wages earners at $106,800 could save up to $4,272.

  7. I work for private industry and my FICA taxes were cut by 2%. However, my federal taxes increased by about the same amount. This also occurred in my husband’s check…we had no net difference. Any insight as to why that happened?

  8. Wow, big deal !! Payroll tax holiday, my foot !! So I get a couple of extra dollars per paycheck – “Oh, goody…” LOL… I gross appx. $76,500/yr. in addition to taxable interest income; however, when I file, my adjusted gross income comes out to much less after 401(K) deductions, etc.

    Anyhow, the “Making Work Pay” benefits suited me much more than this ridiculous payroll tax holiday ever will. Since paying off my mortgage loan & not having anything to write-off, I always end up owing the government; however, in 2011, I’ve donated appx. $4,000 to worthy charitable organization recognized by the IRS. So I am really hoping this will somehow off-set the amount I owe to our federal government in 2012.

  9. Holden Caulfield Reply

    I came here today to Google when the payroll tax holiday was initiated. Imagine my fascination when I got to the last two paragraphs of your article, the one where you mention this “holiday” could become a political football in the midst of the election cycle. Very prescient on your end;

    what I would like to see is something you and I both know we’ll never see. If certain individuals and political parties dogmatically repeat that tax cuts always create jobs, let them prove it: An employer only gets a tax cut WHEN they create the job. Right now this whole experiment is perpetuated on the grossly oversimplified (and tragically misunderstood) promotion of the “Laffer Curve”, which Arthur Laffer himself confessed was nothing more than a hypothetical construct. Republicans treat it as if it were carved in a granite tablet. Maybe in the Reagan library it actually is, I don’t know.

    But what bothers me is that none of this stuff is ever ferreted out in the end – Mark Twain said in the late 19th century, “There are lies, damned lies, and statistics”. One can only guess what he would think in 2011 to see how “facts” and figures are thrown around by both sides as if they were somehow delivered on granite tablets from on high, and nobody seems to be able to call them out when one sides numbers makes a liar out of the other – or themselves.

    Somebody show me a tax plan that gives an employer credit when the person officially goes on the payroll.

    How about a better one – dock them when the worker comes off the payroll. As it stands now, when an employer can trim his bottom line and keep the investors (or the proprietor) happy and in the black by sending those beneath him to the unemployment line, this trend of the rich(er) never missing a meal because they’re being fed though money taken away from people who were poor(er) to start with is a rather twisted fact of capitalism.

    That Congress has more money than the Fed (it seems) when you try to count all the dollars flying through the lobby of the Capitol building is the root of our problem, and the problem will never be solved under the current system: Even before Citizens United, that we can still allow 535 + 1 person to control their own income – income derived from money we give them – so that they can dictate fiscal policy that affects the rest of us and still say that everything is subject to “market forces” is too great a lie to keep perpetuating.

    Republicans talk as if somehow the only thing government can do is destroy jobs, that jobs are only “created” when government sits on it’s hands or shackles itself is simply a claim that has no evidence. There are other factors in this equation, and the average American voter is too simple-minded to grasp even a few of them.

    Our elections are trusted to people who are too busy (and hungry) to understand the problem, as well as to people who are so rich as to have disposable income that is hundreds, thousands of times in excess of what most of us are barely sustained by. It doesn’t take an economist or anything more complex than any kid who’s played Monopoly to realize that when one player (or a statistically equivalent few of them) has all the money, the game is over.

    Sadly, those seem to be the “rules of the game” that the people who get to set the rules always want to play by. Who could have seen that coming.

    That I have to face my neighbor’s radio and TV turned to stations where some sanctimonious windbag who makes his money by stirring up discord between neighbors can tell me to “get a job”, when even he knows good and ***damn well there arent’ any out there, is beyond any forgiveness I have left.

    In the end, we’re at a point where the people who derisively say “GET A JOB” to those who are trying to their wits end, need to be forced to pony up some intellectual honesty: When there are 400 applicants for every open position, that doesnt’ mean the 399 who go home unemployed are “lazy”. I, for one, would like to hear just one of my neighbors who have a job, sit down at Thanksgiving dinner and say to his family, “Tonight I am grateful that my other neighbors are unemployed, because that means I still have one of the jobs that they can only wish they had, and I’m honest enough to admit to whatever gods that might be, I don’t know why they picked me and not them. I’m grateful that there are unemployed, because those only remind me of all the other people who could be doing my job, which I still have”.

    And in the end, that the richest of the rich can keep us down here kicking the teeth out of each other for jobs so poorly rewarded and still somehow we stay grateful for having table scraps (for they might take those away if thou doth protest too loudly) – that’s the sick part.

    We live in a zero-sum economy. Reagan said that a “rising tide lifts all boats” – what he forgot to mention is that if you dont’ have a boat to begin with and the tide goes up, you better be able to swim like hell, reach dry land, or you’re going to drown.

    The payroll tax holiday will take about $20 a week out of our monthly budget. We spend $80 a week on gas.

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