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The 2010 Tax Relief Act, enacted during December 2010, impacts all taxpayers. One provision has an immediate impact on employees and the businesses that employ them, as well as not-for-profit organizations with employees and individuals who have household employees.
The Social Security tax, also known as the Old-Age, Survivors and Disability Insurance (OASDI) tax, has been reduced effective in 2011 from 6.2 percent to 4.2 percent. The reduced rate applies only to the employee share; that is, employers must continue to pay their share of the tax at the previously applicable rate of 6.2 percent. Furthermore, the Medicare portion of the federal payroll tax, amounting to 1.45 percent on each of the employer and the employee, was not changed.
Therefore, withholding on employees for FICA, which includes both the OASDI tax and the Medicare tax, is 5.65 percent for the year 2011.
The IRS has advised that employers were required to implement the new withholding rate as soon as possible but no later than Jan. 31, 2011. Further, if an employer withholds an excess amount of OASDI tax due to the rate decrease, the amount must be corrected by making an additional payment to the employee no later than March 31, 2011.
The change in the law also provides that the reduction in tax payments is to have no impact on future Social Security benefits.
It is important to note that this change applies only for 2011.
This tax tip submitted by:
Bob Turner, CPA
Mueller & Co., LLP
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