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Payroll tax holiday – new law

 

For wages received during 2011, the 2010 Tax Relief Act reduces the employee OASDI tax rate under the FICA tax by two percentage points to 4.2%. (Similarly, for self-employment income for tax years beginning in 2011, the OASDI tax rate under the SECA tax is reduced by two percentage points to 10.4% percent.) As a result, for 2011, employees will pay only 4.2% Social Security tax on wages up to $106,800 (and self-employeds will pay only 10.4% Social Security self-employment taxes on self-employment income up to $106,800).

In the new Circular E, IRS advises employers to implement the 4.2% employee Social Security tax rate as soon as possible, but not later than Jan. 31, 2011. After implementing the new 4.2% rate, employers are told to make an offsetting adjustment in a subsequent pay period to correct any Social Security tax overwithholding as soon as possible, but not later than Mar. 31, 2011.

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