Recent tax changes affecting payroll may be confusing for employers and employees. I thought it would be helpful to recap these changes to help you better understand and communicate with your employees. While those on your payroll may wind up with a slightly larger net (take-home) pay resulting from these changes, the amount will depend on their marital status and withholding. Ending of the Advanced Earned Income Tax Credit
The government eliminated the “advance” feature that allowed taxpayers to receive their earned income tax credit (EITC) spread out through the year in their paychecks. Your employees who were receiving the credit as an advance in their pay may be concerned that the EITC has gone away for good. You can assure your employees they can still take the credit as a lump sum on their annual 1040 tax return. For more info, read A Quick Update for Employers on the Earned Income Tax Credit.
The Tax Relief, Unemployment and Insurance Reauthorization and Job Creation Act of 2010
Enacted in December 2010, this act extended for two years the tax cuts that were due to expire, preventing a large tax increase for American workers. This Act did not, however, extend the 2009-10 Making Work Pay (MWP) credit that was factored into the rate tables for those years. The 2011 tax tables reflect the loss of this MWP credit.
New Payroll Tax Withholding Tables
For 2011, the government lowered the amount that workers contribute to to their Social Security to 4.2%. Employers still contribute to Social Security at the same rate of 6.2%.
The IRS gave employers until 1/31/11 to adjust for the Social Security payroll tax “holiday” on their employee paychecks or change it in their payroll software. If you haven’t made this change and ran payroll calculating the 6.2% employee share instead of the new rate, you’ll need to issue your employees a refund for the amount.
How the Tax Changes Affect Pensioners
Retired employees receiving pensions may question why their retirement checks are smaller. Retirees receiving pensions aren’t getting the 2% payroll tax break on their Social Security; the amount they contribute remains at 6.2%. Retirees also didn’t receive the Making Work Pay credit for the last two years, but your payroll administrator might have adjusted their withholding using separate tax tables for those years. With the new withholding tables, retirees may see their withholding increase by $7-50 per payment, depending on the filing status, payment amount, and frequency of their pension checks.