Deadline To Implement New Withholding Tables And 4.2% Employee OASDI Rate Draws Near

Employers are reminded of the pending Jan. 31, 2011 deadline for implementing the new 2011 withholding tables and 4.2% employee Social Security tax rate, which reflect changes made by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Relief Act, P.L. 111-312). Employers are further reminded that, after implementing the new 4.2% rate, they should make an offsetting adjustment in a subsequent pay period to correct any Social Security tax overwithholding by Mar. 31, 2011.

New law income tax changes for 2011. The 2010 Tax Relief Act made many changes affecting employee income tax withholding for 2011. For example, by delaying sunsetting tax provisions for two years, it kept in place today's favorable income tax rates for individuals and prevented married taxpayers filing jointly who claim the standard deduction from being penalized by a marriage penalty.

New law payroll tax holiday. The 2010 Tax Relief Act also reduced the employee OASDI tax rate under the FICA tax by two percentage points, to 4.2%, for remuneration received during 2011. As a result, for 2011, employees will pay only 4.2% Social Security tax on wages up to $106,800 (the Social Security wage base limit). The employer tax rate for Social Security remains unchanged at 6.2%.

Observation: The maximum reduction in FICA tax for an individual employee is $2,136 ($106,800 ×.02). For a married couple, each with wages of $106,800 or more, the maximum reduction is $4,272.

Implementing the 2010 Tax Relief Act. Although withholding tables are typically released annually in November to give payroll professionals sufficient time to get the tables into their computer systems before the new rates go into effect in January, they were delayed for 2011 because of uncertainty regarding the 2011 tax rates. In late December, following the passage of the 2010 Tax Relief Act, IRS issued Notice 1036, Early Release Copies of the 2011 Percentage Method Tables for Income Tax Withholding, carrying advance copies of the 2011 percentage method tables for income tax withholding. The tables reflect changes made by the 2010 Tax Relief Act.

Notice 1036 and an accompanying news release, IR 2010-124, explained that employers should implement the new 2011 withholding tables and 4.2% employee Social Security tax rate as soon as possible, but not later than Jan. 31, 2011. After implementing the new 4.2% rate, employers are also instructed to make an offsetting adjustment in a subsequent pay period to correct any Social Security tax overwithholding as soon as possible, but not later than Mar. 31, 2011. These rules were covered further in Publication 15 (Circular E), Employer's Tax Guide for use in 2011.

References: For withholding on wages, see FTC 2d/FIN ¶H-4220; United States Tax Reporter ¶34,014; TaxDesk ¶532,000; TG ¶9150.