By Mary Ellen Schill
December 22, 2010
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (“2010 Tax Relief Act”) provides a major change in the withholding of Social Security taxes from employees’ wages and provides for the extension of several other benefit related provisions that were set to expire on December 31, 2010. Attorney Melissa Kampmann recently authored the legal update titled, “The 2010 Tax Relief Act: What It Means For You” which explores the effects of the Act on estate planning. This legal update is a second in the series and focuses on the tax implications for employers.
Reduction in Employees’ Social Security Taxes
The 2010 Tax Relief Act makes a substantial change to the withholding of Social Security taxes from employees’ wages by reducing the employee share of Social Security tax from 6.2% to 4.2% for the first $106,800 of wages paid in 2011. This means that the maximum that can be withheld in 2011 will be $4,485.60 compared to a maximum withholding in 2010 of $6,621.60. Note that the employer’s share of FICA taxes is not being reduced.
The Internal Revenue Service released instructions to help employers implement the 2011 reduction in payroll taxes, along with new income-tax withholding tables that employers will use during 2011 to reflect the changes in income tax rates for 2011. The IRS realizes that the late enactment of these changes makes it difficult for many employers to update their payroll systems before January 1, 2011. For that reason, the agency requests that employers make the changes as quickly as possible, but no later than January 31, 2011.
Employers and payroll companies will be responsible for these withholding changes, so employees won’t need to make adjustments by filing a Form W-4 for the reduction of tax. However, it is important for employees to review their withholdings every year, and more often after events such as marriage, having children, buying a home, getting divorced, or other circumstances which typically affect the actual taxes owed.
Also note that the HIRE Act that exempted employers from paying their share of Social Security taxes on the wages of certain newly hired employers after February 3, 2010 and before January 1, 2011, was already scheduled to expire for wages paid after December 31, 2010.
Other Payroll-Related Provisions Extended
Employer-Provided Educational Assistance: The income exclusion for up to $5,250 of employer-provided undergraduate and graduate assistance is extended for two years (2011-2012).
Adoption Assistance: The income exclusion for up to $13,170 of employer-provided adoption assistance is extended for one year beyond its original expiration date of December 31, 2011. The income exclusion for 2011 is $13,360.
Child Tax Credit: The increase from $500 to $1,000 in the maximum child tax credit for individuals with income below certain thresholds is extended for two years. This means the maximum credit will be $1,000 for 2011 and 2012. Employees can claim additional allowances on Form W-4 based on their eligibility for the credit.
Dependent Care Credit: The increase in the maximum child care expenses that qualify for the dependent care tax credit (35%) from $2,400 to $3,000 for one child is extended for two years (2011 and 2012). The maximum credit for two or more children is increased from $4,800 to $6,000 for 2011 and 2012 also.
Teachers’ Classroom Expense Deduction: The 2010 Tax Relief Act restores for 2010 tax returns a $250 deduction available to teachers and other school professionals for expenses paid for books, supplies, computer equipment, and other supplementary materials used in the classroom. The deduction is also now available for 2011 tax returns. Our attorneys are ready to assist employers with the changes the 2010 Tax Relief Act brings to employment taxes and benefit plans. If you have questions regarding the above, please contact Mary Ellen Schill, the author of this article, or any of the attorneys in the Employment, Benefits & Labor Relations Practice Group of Ruder Ware.
This document provides information of a general nature regarding legislative or other legal developments, and is based on the state of the law at the time of the original publication of this article. None of the information contained herein is intended as legal advice or opinion relative to specific matters, facts, situations, or issues, and additional facts and information or future developments may affect the subjects addressed. You should not act upon the information in this document without discussing your specific situation with legal counsel.
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