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Workers will see late paycheck gift

Social Security: Tax Relief Act puts a little more in your 2011 wallet

Posted: January 5, 2011 10:02 p.m.
Updated: January 6, 2011 4:55 a.m.

Workers can expect to see a reduced Social Security deduction on their paychecks this year as the federal government has lowered the amount taken from wages to encourage employees to spend.

Employees are receiving belated Christmas gifts courtesy of the federal government this month: a decrease in the amount of Social Security taxes withheld from their paychecks.

Payroll deductions for Social Security taxes will drop 2 percentage points this year.

With the passage of the Tax Relief Act of 2010 in December, federal legislators hope the small boost in take-home pay this year will encourage people to spend the extra money, stimulating the economy.

For 2011 only, employees will pay 4.2 percent of their wages, up to $106,800, to the government retirement and disability plan, rather than the standard 6.2-percent rate.

Employers will continue to pay the 6.2-percent rate for their share of employee-based taxes paid into the Social Security system.

The reduced Social Security withholding will have no impact on employees’ future Social Security earnings.

Independent contractors
The change also benefits freelancers, farmers and others who are self-employed.

These workers will see a corresponding reduction in their self-employment tax for 2011, decreasing their tax rate from 15.3 percent to 13.3 percent for the year.

“The self-employed won’t see any immediate benefit until they begin filing their taxes in 2012 for 2011, and when they file quarterly estimated payments,” said Michael Green, owner of Michael L. Green Tax & Financial.

Green said his firm advises clients of the change for 2011 as they meet with them to file taxes and adjust their estimated quarterly payments.

Payroll services
Signed into law Dec. 17, the new law creates some havoc for payroll departments that must update their systems to reflect the new withholding rules.

While the reduction in Social Security taxes paid by workers took effect Jan. 1, employers have until the end of the month to adjust their payroll systems and use the new income withholding tax tables released by the Internal Revenue Service.

The IRS granted firms with added time because it recognized that late enactment of the tax law made changes difficult for many employers to update their systems before the law took effect.

If companies are not able to make the adjustments in their payroll systems by Jan. 31, they must reimburse employees for the difference no later than March 31.

The IRS notified employers and payroll service firms of the withholding changes and said it worked closely with the tax-software industry and tax-professional community.

“There have been several changes in payroll-tax laws over the past years,” said Debra Grandinetti, co-owner of Payroll Providers, a local payroll-processing company.

She said her firm was aware of the changes coming through ongoing communication from the IRS, the state’s Employment Development Department and as members of the American Payroll Association.

Payroll Providers software is already updated to accommodate the withholding changes for their clients, Grandinetti said.

“We use e-mail communication with our clients to notify them of all payroll laws and tax changes,” Grandinetti said.

Filing delays
Due to the late passage of the Tax Relief Act, the IRS itself will not be able to process some tax returns until middle or late February. This delay includes both e-file and paper returns.

Taxpayers affected by the delays are those who file returns claiming itemized deductions on Schedule A, declare higher education tuition and fees deductions or educators who file out-of-pocket expenses.

The Tax Relief Act reinstated deductions that had expired, such as those teachers can claim, tuition deduction and optional sales tax deductions.

For taxpayers who file their own tax returns using Intuit’s software application Turbo Tax, the personal software finance company said it will securely hold all returns filed early until the IRS begins processing returns.

The company said its products are already up-to-date with the latest changes.

“The majority of taxpayers will be able to fill out their tax returns and file them as they normally do,” said IRS Commissioner Doug Shulman.

Grace period
Another gift to tax filers this year is in the form of a three-day grace period for filing Form 1040 federal tax returns.

Emancipation Day, a holiday observed in the District of Columbia, falls on April 15, so the extension was made.


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