I’ve had a few clients ask “why are some of our employee paycheck’s net pay lower in 2011 when the tax cuts were extended, and the government reduced Social Security Tax withheld?” and I’ve tried to answer as detailed as I can for them. For some employee’s (typically those making less than $20K a year), the net pay may actually decrease due to the changes in the IRS Publication 15 from 2010 and 2011.
In short, although President Bush’s tax cuts were extended, some of President Obama’s were not. “Making Work Pay” expired on 12/31/2010, which started back in 2009. Anyone making less than $20K a year will probably see an increase to their overall tax withholding, rather than less due to the expiration of that act, even with the reduction in Social Security.
Now for the long version:
The Tax Relief Act of 2010 was extended for 2 years, and all that really did was keep the first tax % at 10% (the current rates are 10%, 15%, 25%, 28%, 33%, and 35%, and would have changed to 15%, 28%, 31%, 36%, and 39.6% if the law wasn’t extended). It did not stop the taxable brackets from changing. If you compare IRS Publication 15 from 2010 and 2011, you will see that the wage brackets start lower this year. For example, the single tax bracket started taxing wages at $6,050 in 2010, but in 2011 it will start taxing at $2,100. This is the same with most of the brackets for both married and single. This is actually a move lower like they were back before 2009 (02/21/09 there was a shift to raise the first bracket due to “Making Work Pay”).
EXAMPLE: If you were a single employee with no exemptions and no pretax deductions that made $35,000 in 2010, you would have been taxed $4,123.75 for the year. In 2011, the same example will be taxed $4,510. Both fit in the 15% tax bracket, but the bracket “Over” and “But Not Over” amounts have shifted down, and therefore they will pay taxes sooner on money. On a weekly pay, it ‘s the difference of $7.43 extra.
In the example above, the employee would have paid $2,170 in Social Security Tax in 2010, however in 2011 they will only pay $1,470. In this scenario, the employee has $13.46 less withheld in Social Security tax every week, causing an increase in overall net pay of $6.03.
Review Page 37 of 2011’s Publication 15 from the IRS (look at the Annual Pay Period rates) and compare it to page 40 of the 2010’s Publication 15. Run a few scenario’s on wages and you will see the differences. There’s also a great article on this at http://www.mydollarplan.com/payroll-tax-cut/.
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