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?