Congress Passes Tax Relief Bill With 2% Employee Social Security Tax Reduction

0
taxes

Just before midnight on December 16, the House of Representatives passed H.R. 4853, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Tax Relief Act of 2010), one day after passage by the Senate. The bill has been sent to President Obama, and he is expected to sign it during the afternoon of Friday, December 17. When signed, the law will continue the Bush-era tax rates, which were set to expire on December 31, 2010, for two years, through December 31, 2012.

The law will also reduce the social security tax rate paid by employees from 6.2% to 4.2% for wages paid in 2011 and continue several expiring payroll-related tax breaks, including non-job-related employer-provided educational assistance, adoption assistance, qualified mass transit and van pool benefit parity with employer-provided parking, and the Work Opportunity Tax Credit.

Tax rates for individuals extended for two years

Under the Tax Relief Act of 2010 (TRA 2010), the current tax rates of 10%, 15%, 25%, 28% 33%, and 35% will stay in effect beyond their expiration date of December 31, 2010, for two years, through December 31, 2012. Had TRA 2010 not been enacted, the 10% rate would have been eliminated and the other rates would have been set at 15%, 28%, 31%, 36%, and 39.6%, beginning January 1, 2011. TRA 2010 also extends marriage penalty relief that set the standard deduction for married individuals filing jointly at double that for single individuals and widened the 15% tax bracket to twice the size for joint filers that it is for single individuals.

Reduction in employee social security tax rate

TRA 2010 makes a major change in 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. The maximum that can be withheld will be $4,485.60, a $2,136 decrease from the 2010 maximum of $6,621.60.

Employers will continue to pay the full 6.2% of their employees’ covered wages paid in 2011 for their share of social security taxes. Remember that the HIRE Act, which exempted employers from paying their share of social security taxes on the wages of certain employees who were newly hired after February 3, 2010, and before January 1, 2011, does not apply to wages paid after December 31, 2010.

Self-employed individuals, who currently pay 12.4% of their income in social security taxes, will pay 10.4% up to the $106,800 wage base.