If you work and pay into Social Security, you will see an increase in your paycheck for 2011 and 2012, as for two years only, the employee’s share of the payroll tax will be reduced.
The Federal Insurance Contributions Act (FICA) tax is a payroll tax imposed by the federal government to fund Social Security and Medicare. Both employees and employers are responsible for sharing the FICA payments. The 2010 Tax Relief Act reduces the employee-share of the Old-Age, Survivors, and Disability Insurance (OASDI) portion of Social Security taxes from 6.2% to 4.2% for wages earned during the 2011 and 2012 calendar year up to the taxable wage base of $106,800 for 2011 and $110,100 for 2012. The reduction does not affect the 1.45% Medicare tax, which is assessed on all earnings. Self-employed individuals will pay 10.4% on self-employment income up to the threshold, rather than 12.4% as last year.
This payroll tax reduction will not affect your future benefits. The government plans to make up the lost income by transferring an estimated $120 billion from the general Treasury to the Social Security trust fund. Until now, Social Security has always been completely self-financed. By law, income to the trust funds must be invested in securities guaranteed as to both principal and interest by the Federal government. All securities held by the trust funds are “special issues” of the United States Treasury. Because the government spends this borrowed cash, some people see the current increase in the trust fund assets as an accumulation of securities that the government will be unable to make good in the future. The Social Security Administration maintains that “the special-issue securities are just as safe as U.S. Savings Bonds or other financial instruments of the Federal government.” Now, despite popularity, some people are worried that Social Security will lose favor if it is perceived as adding to the federal deficit.
The new payroll tax holiday period is estimated to affect more than 155 million workers and inject more than $110 billion into the economy in 2011 and similarly for 2012. Consider what you will do with an extra 2% of wages in your pocket. On an income of $50,000 that is an extra $1,000 in your pocket for the year. The government hopes you will spend and stimulate the economy, but directing the found income into your retirement account might not be a bad idea.
Unlike the Making Work Pay Credit, which expired at the end of 2010, the 2% reduction is available to all wage earners with no phase out income limits. The employer’s share of OASDI remains at 6.2%. In 2010 certain employers were eligible for payroll tax forgiveness under the Hiring Incentives to Restore Employment (HIRE) act; however, payroll tax forgiveness for employers under the HIRE act ended December 31, 2010, and was not extended under the 2010 Tax Relief Act.
The reduction in your payroll tax is just one of the changes courtesy of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. For more information regarding this topic, please contact Henssler Financial at 770-426-9166 or experts@henssler.com
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