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The 2011 Payroll Tax Holiday

Written by Nickel - 19 Comments

The 2011 Payroll Tax Holiday

As you’re likely aware, Congress recently agreed to extend the Bush-era tax cuts, which means that tax rates in 2011 will look the same as they did in 2010.

If you were paying attention, you might have also heard the phrase “Payroll Tax Holiday.” Today I want to talk a bit about what that means.

What is the payroll tax?

The payroll tax refers to the Social Security portion of your FICA taxes. As I’ve noted in the past, this works out to 6.2% of your gross compensation. The balance of your FICA taxes (1.45%) goes to Medicare, for a grand total of 7.65% on the employee side.

As I’ve also noted in the past, there is a ceiling associated with your Social Security taxes. As things currently stand, only the first $106,800 of your earned income is subjected to this tax. After that, you continue to pay the Medicare tax, but the Social Security tax drops off.

The tax holiday

So what’s all this talk about a payroll tax holiday? Well, during 2011, your Social Security taxes will be reduced by 2%, from their current 6.2% level to 4.2%. Because of the tax ceiling, this works out to a maximum savings of $106,800 x 2% = $2136.

In case you’re wondering, employers will continue to pay their share of the payroll tax at the full 6.2% rate, so… If you’re self-employed, and thus responsible for both halves, you’re only getting half a break.

The payroll tax holiday timeline

Because this legislation got passed at the last minute, employers don’t have a lot of time to update their payroll systems. According to tax blogger Kay Bell, the IRS has asked all employers to have the changes in place no later than Jan. 31, and to rectify any over-withholding by the end of March.

So… The bottom line here is that most workers will see their paychecks grow by 2% as we head into 2011. If your employer is slow to implement the changes, just be patient. But if things develop too slowly, don’t be afraid to ask your HR department about what’s going on.

Published on December 22nd, 2010
Modified on June 23rd, 2011 - 19 Comments
Filed under: Taxes

About the author: is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!

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19 Responses to “The 2011 Payroll Tax Holiday”

  1. 1
    beth Says:

    Isn’t it true though that the Making Work Pay credit is expiring? Therefore, it seems likely that the majority of people won’t notice much difference in their paychecks, or may in fact be worse off.

  2. 2
    Mike B. Says:

    Correct — MWP will be a flat change, while this is a percentage. Some people at the low end will get less benefit from this, and have an effective increase in their tax withholding YOY. Some people at the higher end will see a significant drop from this.

    Honestly, this worries me. Congress is notoriously scared of “letting taxes go up”. So next year, when the “holiday” expires, everyone will panic about the increase, and they’ll do yet more deficit spending to fund something else.

  3. 3
    someguy Says:

    Does this tax holiday apply to self-employed folks? I have found scant discussion on the topic.

  4. 4
    Greg McFarlane Says:

    Isn’t it great to know that there’s still one regressive tax out there? The more you make, the smaller the percentage of it you pay in Social Security taxes. I guess that should give us incentive to make as much money as possible.

  5. 5
    Nickel Says:

    Greg: The credits that you earn are also capped based on the salary limit, so it’s not like high income earners are getting something for nothing. They pay in up to the salary limit and earn benefits based on what they’ve paid in.

  6. 6
    Patrick Says:

    What bothers me is that with social security already projected to not bring in as much as it pays out and Congress decides to bring in less on purpose.

    This means that someone in the five years there will have to be a raise in what is collected. When this expires I would not be surprised to see them add an additional half or full percentage to what is collected, i.e. instead of you and the employer paying 6.2% each I can see both parties paying anywhere from 6.5-7%.

    Remember, there is no free lunch. By 2015 a person making $100k could very well see themselves paying over 55% in total taxes after you include federal, state, county and sales taxes. Good times.

  7. 7
    Courtney Says:

    Do changes in payroll taxes affect your taxable income for federal and state taxes? Meaning, do you get to keep the full 2% or is it more like 1.4% after income taxes?

  8. 8
    nta Says:

    Patrick…that is what I am puzzled by too…Why are we further weakening Social Security?

  9. 9
    BG Says:

    Courtney, AFAIK the payroll tax never offsets the income tax (or vice-versa). You pay both taxes, on every eligible dollar; and the tax paid on one system doesn’t affect the taxes on the other system.

    So, yes: you get to keep all of that extra-money, since you’ve already paid the income (and medicare, etc) taxes on it.

    Nickel) technically the tax is reduced 16%, from 12.4 cents on every dollar to 10.4 cents on every dollar (below the cap). Just because someone works for an employer, doesn’t mean that the employer’s share of taxes already aren’t already figured into their ‘wages’. It is just not itemized on the paystub. Self-employed people see this clearly, and employers also use this knowledge when hiring people (or to not hiring people) and when they decide to give a raise or not.

    #4 Greg) I agree with you! Social Security taxes shouldn’t have an income-cap, where income below $106,800 has a 12.4% tax — and the income above pays a 0% tax. My vote: remove the caps, and ‘means-test’ the benefits: meaning you need to prove you need the SS-benefits (like one would do for Food Stamps).

    The majority of people who earn less than $106,800 (the cap) pay much more in Social Security taxes than income taxes. Keep this in mind when you hear babbling on FoxNews where they claim “50% of people pay no income taxes”: these people more than make up for it in Social Security/Payroll taxes.

    Patrick and nta): This is what you get when the democrats and republicans decide to “work out a deal”. More spending and less taxation. The federal debt/defict is gonna be massive.

  10. 10
    Nickel Says:

    someguy and BG: I touched on both the employer’s share as well as the impact on the self-employed in the following passage…

    In case you’re wondering, employers will continue to pay their share of the payroll tax at the full 6.2% rate, so… If you’re self-employed, and thus responsible for both halves, you’re only getting half a break.

  11. 11
    Belkin Says:

    There is NO ‘employers-share’ of FICA — the employee pays it all !

    This payroll tax charade has been discussed here before at length.

    Also, ObamaCare will raise the total Medicare portion of FICA to 3.8% in year 2013.

  12. 12
    Dale Says:

    I predict congress will keep if not further reduce this “holiday” next and following years all to accelerate the eventual elimination of social security benefits for “retired” folk alltogether. The propaganda machine is working as evidence by the dramatic increase in percentage of those not counting on ss benefits in the future.
    Good times and noodle salad ahead.

  13. 13
    Eric Says:

    I’m just gonna automate a 2% transfer every paycheck into my savings so I don’t end up blowing it. :)

  14. 14
    Patrick Says:

    @Dale: As scary as it might seem you may have made the most logical response yet. The easiest way to do away with social security is to simple stop funding it.

    What concerns me is that the Government is still spending way more than they bring in, so its not like them taking less out of our paychecks for social security is going to increase tax revenue.

    Maybe the 2% will just get tacked on to the federal income rate since we all know they just take the money and spend it how they want regardless of what the money is collected for in the first place. Maybe they should do away with all categorized taxes and just take the friggin 25% and be done with.

  15. 15
    laurie Says:

    Has anyone seen a paycheck increased? On the lower level earner, their taxes actually went up! Has anyone taken a look at the new Federal Withholding tax tables in Publication 15 for 2011? An individual making $250 a week claiming single/0 now brings home $2.69 LESS than last year due to the new federal withholding tax tables! The government just takes money from one place and puts it somewhere else, the whole time trying to make us all believe we are getting a break!

  16. 16
    Leroy Says:

    Hey Laurie, yes I’ve noticed that on my paycheck! The Federal Witholding taxes went UP for me :(

    What’s all the talk about “extended tax benefits”? I haven’t seen any so far!

  17. 17
    james Says:

    Leroy and Laurie,

    I make less than 50K a year. My federal taxes went up just as you’ve noted, but my state went down $5 and the Social Security tax went down. When i add up all the reductions and increases i still have a net positive of $14 per paycheck. Check the other numbers on your FICA section of your pay stub.

  18. 18
    BG Says:

    #15 laurie) That is correct. If you earn less than about $20k (single) or $40k (married), your taxes are going to be higher in 2011 than in 2010.

    This is because the ‘Make work Pay’ credit you received in 2010 ($400 single, $800 married) was worth more than the ‘Payroll Tax Holiday’ (2%) you are getting in 2011.

    People who earn more than this will pay less taxes; of course, the more you make the lower the taxes will be. A two-wage couple earning $106k each will have around a $3,500 lower tax bill in 2011 (compared to 2010).

    Sorry.

  19. 19
    Jeanne Glick Says:

    Eliminate FICA and medicare taxes completely both on the employer and the employee. Make up lost revenue through decreased expenditures or increased FWT rates. This is truly “shared” sacrifice and may help the job situation. Far minded persons from the far-left to the far-right can unite on this one.

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