Friday, February 18, 2011

IRS Explains Why Employee Withholding Amounts Have Changed in 2011

The IRS has recently issued guidance on why employee withholding amounts are different in 2011.

A provision in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the 2010 Tax Relief Act) increased employees' take home pay, effective with wages earned beginning Jan. 1, 2011, by reducing the employee Social Security withholding tax rate from 6.2% to 4.2% for one year. However, this new law did not extend the Making Work Pay credit in the American Recovery and Reinvestment Act of 2009 (ARRA, P.L. 111-5) beyond Dec. 31, 2010. Certain employees received this credit incrementally through a reduction in the amount withheld from their paychecks. As a result of the above changes, employee take home pay is different in 2011. IRS Special Edition Tax Tip, 2010-11, 2/10/11, notes that for most employees, the net effect of these two changes will result in less total tax being withheld from their paychecks. However, some employees with modest incomes are now having more total tax withheld from their paychecks because the 2% reduction in the Social Security withholding rate only partially offsets the elimination of the Making Work Pay credit [IRS Issue Management Resolution System (IMRS) Issue 10-0001411].

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