Paycheck Update: Reduction in FICA Tax Rate for 2011, Increase in Federal Income Tax Rate

In mid December President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, also referred to as the Tax Relief Act of 2010. One of the key provisions of the Act is a reduction in the FICA tax rate paid by employees from 6.2% to 4.2% on wages paid in calendar year 2011. This change will result in less FICA tax being withheld from your paycheck, resulting in more take-home pay each pay period. It is important to note the reduction in the FICA tax rate is only for 2011 and will return to the 6.2% rate in 2012.

One tax provision that expired December 31, 2010, is the Making Work Pay (MWP) credit. The MWP credit was part of the American Recovery and Reinvestment Act of 2009, sometimes referred to as ARRA or the economic stimulus plan. The MWP credit was paid out through reduced federal income tax withholding from March 15, 2009 through December 31, 2010. The expiration of this credit will result in an increase in the amount of federal income tax withheld from your paycheck beginning in January, resulting in less take-home pay. Higher-income taxpayers will see little or no change in their take-home pay.

Generally speaking, the net affect of the reduction in the FICA tax rate and expiration of the MWP credit is that most taxpayers will see an increase in their take-home pay beginning in January. However, the actual change in your take-home pay will depend on your individual circumstances, e.g., your pay, your marital status and the number of withholding allowances you are claiming.

With tax season upon us, now is a good time to review the amount of your federal and state income tax withholdings to ensure the correct amounts are being withheld from your pay. Changes in your financial or personal circumstances may affect the accuracy of your withholding. These include changes in:
• Marital status
• Number of dependents
• Family wage income (more than one job or both spouses working)
• Itemized deductions
• Non-wage income (interest, dividends, capital gains)

Please consultant your tax advisor regarding your personal situation. If you have any questions, contact Steve Jordan, Payroll Specialist, at ext. 14908 or Michelle Smith, Payroll Specialist, at ext. 14422.