Social Security Withholding 2011

There’s good news for employees in regards to social security withholding in 2011. On December 17, 2010, Congress had passed the Tax Relief Act 2010 and signed it into law, making it effective from Jan 1, 2011.

A significant change brought about by the Tax Relief Act 2010 is in the withholding Social Security taxes for employees. For the first $106,800 in wages paid in 2011, there’s a reduction of 2 percent for Social Security Tax on the side of the employee. Previously, the Social Security Withholding rate was 6.2 percent. Currently, the rate is 4.2 percent.

To understand more about the implication of this change, let’s take a deeper look at the Social Security tax. The Social Security tax is applied to labor-related income. If you are an employee or a self-employed entrepreneur, you are required to pay the Social Security tax, which goes into Social Security. The Social Security tax is applied as a flat rate to an employee’s wages or a self-employed entrepreneur’s income.

Prior to the Tax Relief Act 2010, the Social Security tax was set at 12.4 percent. Half of this tax was to be paid by the employee so it came to be 6.2 percent of income earned and the employer had to pay the other 6.2 percent. If you earn $100,000 per annum, $6,200 would be withheld towards your Social Security. Since self-employed people are the employer as well as the employee, they will have to pay the full Social Security. According to the Tax Relief Act 2010, the employee will only have to pay 4.2 percent of the Social Security tax. For a person with an annual salary of $100,000, the amount of Social Security withholding is $4,200. Compared to the previous amount, the reduction represents a tax savings of $2,000. On the employer’s side, the rate still stays at 6.2 percent so an entrepreneur will have to pay 10.4 percent, which is the current Social Security tax rate.

The maximum Social Security tax withholding per annum for 2011 is $4,485.60 which is calculated by multiplying $106,800 by 4.2 percent. For people who earn an income of more than $106,800, the Social Security tax withholding amount is still $4,485.60. In comparison to the rate in 2010 when the maximum Social Security tax withholding amount was $6,621.60, it’s a reduction of $2,136.

Since the Tax Relief Act 2010 went into effect in December, 2010, IRS has mandated that the reduced 4.2 percent Social Security tax rate be implemented by all employers by January 31, 2011. Check your paystub to see that the correct amount is reflected. Depending on your employer, Social Security withholding can be labeled as “OASDI” or “Soc Sec” or “FICA” if Social Security and Medicare tax withholding is combined. If you find that your Social Security withholding is calculated at the previous rate of 6.2 percent, your employer should give a refund of 2 percent by March 31, 2011.

The decision by Congress to put more money into people’s paychecks is mainly to stimulate the economy. As a smart consumer, you should put that extra money to good use. Using tax software such as, TurboTax Online will help you estimate your taxes and to ensure your income tax return will be filed correctly. Let the tax software do all of the hard work for you.