If you're expecting a little extra in your next paycheck from the much-heralded Social Security tax cut, curb your enthusiasm. The 2-percent reduction in the federal payroll tax for 2011 was made law so late last year that many employers may not have had time yet to incorporate it into their first paychecks of the year.
What does that mean for you?
"The first paycheck may be too high with regard to Social Security withholding and the second one, too low," says Scott Mezistrano, Senior Manager of Government Relations for the American Payroll Association, representing the payroll-processing industry. Your employer, he explains, may compensate for withholding too much in your first check by withholding too little in your second check, Mezistrano explains. It may take 'til the third paycheck to get it all right. "It all depends on how quickly an employer can implement the new tax rate," he says. "Some will be able to do it right away, some might take two to three weeks to do it."
The IRS has given employers 'til January 31
to incorporate the Social Security tax change into paychecks, and 'til March 31 to correct withholding mistakes.
This year only, Social Security withholding is 4.2 percent, down from the 6.2-percent rate where it's been for several years. It affects all eligible earnings up to $106,800 annually per person. The new tax reduction is worth up to $41.08 per week, $2,136 per year, for a wage earner with $106,800 or more. A wage-earner making $50,000 in taxable income would gain an additional $19.23 per week, or $1,000 over the course of the year.
However, many middle- and lower-income taxpayers may not see that big a bounce in their take-home. That's because at the same time the Social Security tax cut was implemented, the Making Work Pay Tax Credit, worth up to $400 per person, was eliminated. That credit was available to individuals making up to $75,000, and married couples making up to $150,000.
As we've reported, taxpayers making $20,000 or less actually will take home less this year with the Social Security tax cut replacing the Making Work Pay Credit. "Some lower-income workers may enjoy more of an immediate benefit under the social security tax reduction than they did under the Making Work Pay Credit, but not necessarily more of an overall tax savings," Mezistrano notes.
Mezistrano mentions another hit to some lower-income wage-earners: The elimination of the Advance Earned-Income Tax Credit (EITC). Eligible taxpayers generally get the EITC, a refundable credit, by filing an annual tax return. But the Advance EITC enabled employers to advance a portion of that credit in regular paychecks so earners didn't have to wait 'til the next year's tax season to get the whole amount. To receive the Advance EITC, a worker had to fill out a form and give it to his or her employer. According to the U.S. Government Accountability Office, few took advantage of the Advance EITC; among those who did, few were actually eligible for it.
Still, notes Mezistrano, for those who were eligible, the advance credit was worth up to $35 per week. Now, those folks will have to wait 'til the 2012 tax-filing season—at least 13 months—to get their due.—Tobie Stanger