Employee Benefits Compliance

IRS issues Guidance for Employers on New 2011 Payroll Tax Rates

Employees’ Social Security tax withholding rates will decrease from 6.2% to 4.2% in 2011 (just two weeks from now), as a result of the Tax Bill enacted by Congress late last night and expected to be signed by the President later today. IRS Notice 1036 provides guidance to employers on implementing the tax withholding changes.

The Internal Revenue Service today issued Notice 1036 – guidance to help employers implement the 2011 cut in payroll taxes (two percentage points), along with new income-tax withholding tables that employers will use during 2011. The decreased employment tax rate is one result of the Tax Bill the House enacted just before midnight last night that now goes to President Obama for his signature. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 provides, among other things, a reduction in the Social Security tax withholding rate from 6.2 percent to 4.2 percent of wages paid, and also continues the current income tax rates and brackets. (The one-year reduction in the Social Security tax rate will not affect employees’ future Social Security benefits.)

The IRS recognizes that the late enactment of these changes makes it difficult for many employers to quickly update their withholding systems. For that reason, the agency asks 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 employees’ pay as soon as possible but not later than March 31, 2011.

Notice 1036 contains the percentage method income tax withholding tables, the lower Social Security withholding rate, and related information that most employers need to implement these changes. Publication 15, (Circular E), Employer’s Tax Guide, containing the extensive wage bracket tables that some employers use, will be available on IRS.gov in a few days.

What does the decrease from 6.2% to 4.2% mean for employees? An employee earning $50,000 annually would pay $1,000 less in Social Security taxes in 2011, and an employee earning $100,000 would pay $2,000 less in Social Security taxes in 2011. The lower rates will expire at the end of 2011.