What Tax Cut Deal Means For Your Paycheck
NEW YORK (CNNMoney.com) -- Come January, you'll start to see some changes in your paycheck, as the new Social Security tax break that President Obama signed into law Friday takes effect.
The measure, part of a sweeping package of tax cuts, will reduce the amount of money workers pay into Social Security in 2011, which will mean more take-home pay for many workers, although not for all.
Workers normally pay 6.2% on their first $106,800 of wages into Social Security. As a result of the tax cut deal passed by the House on Thursday night, they will only pay in 4.2% in 2011.
So, for every thousand dollars in wages per paycheck up to the cap, one would only have $42 withheld (4.2% x $1,000), rather than $62 (6.2% x $1,000).
But given how late in the year it is, it may take employers a couple of pay periods to get everything working as it should.
Employers typically need a few weeks to program and test their new payroll systems. The IRS just issued guidance on Friday morning, a few weeks later than normal because Congress waited until the very last minute to render its decision on tax policy for 2011.
"It could be the third paycheck of the year before you see a 'normal' check," said Scott Mezistrano, senior manager of government relations of the American Payroll Association.
Here's what that might mean:
Say you make $1,000 a paycheck. Your first paycheck in 2011 may have $62 withheld -- or $20 too much -- because your employers' payroll tax system has not been fully re-programmed, Mezistrano said.
To compensate you for that, only $22 may be withheld in your second paycheck (4.2% x $1,000 - $20).
And, with any luck, by your third paycheck in 2011, everything will be set to the right dial.
The IRS on Friday asked employers "to adjust their payroll systems as soon as possible but not later than Jan. 31, 2011. For any Social Security tax over withheld during January, employers should make an offsetting adjustment in workers' pay as soon as possible, but not later than March 31, 2011."
Once everything comes out in the wash, however, the Social Security tax breaks will mean several hundred if not a couple of thousand extra dollars in many workers' pockets for the year.
How much more they will net relative to this year depends on whether they qualified for the expiring Making Work Pay credit. That credit provided up to $400 to any working individual making less than $75,000 (or up to $800 for working couples making less than $150,000).
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