Monday, January 17, 2011

Tax Relief Act

The Tax Relief Act of 2010 (TRA 2010) makes a major change in the withholding of social security taxes from employees' wages by reducing the employee share of social security tax from 6.2% to 4.2% for the first $106,800 of wages paid in 2011. The maximum that can be withheld will be $4,485.60, a $2,136 decrease from the 2010 maximum of $6,621.60.

The IRS is asking employers to update their payroll systems as soon as possible, but not later than January 31, 2011. For any social security tax over-withheld during January because of the rate change, employers should make an adjustment in employees' pay as soon as possible, but not later than March 31, 2011.

The benefits that are recorded by the Social Security Administration for employees will be unchanged by this new reduction in rate. It is still unknown if this reduction in rate will be extended past 2011. Tax returns (Form 941/943/944) are expected to be revised, but the IRS has not released any details as of yet.

The IRS released Notice 1036, December 17, 2010, which contains the percentage method tables for federal income tax withholding from wages paid in 2011. Again, the IRS is asking employers to update their payroll systems as soon as possible, but not later than January 31, 2011.

Notice 1036 is posted on the IRS website for further details: http://www.irs.ustreas.gov/newsroom

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