You may have missed it, but when Congress approved the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 in December, which is commonly called the extension of the Bush tax cuts, it mandated a major cut in the Social Security tax you pay. Instead of forking out 6.2%, you now pay 4.2% for all wages earned up to $106,800.
Because the law was passed late in 2010, employers had until Jan. 31 to reduce the amount of Social Security tax withheld. If any tax was withheld in January, they need to make an adjustment to workers’ paychecks by March 31. The tax change only applies to this calendar year.
How does the change impact me as an employee?
According to the U.S. Census Bureau, the median household income in the United States was nearly $50,000 in 2009. So if you earn $50,000 per year, the cut in Social Security tax cut means an extra $1,000 in your paycheck for the year.
To make sure the proper amount of tax is being withheld, you can divide the Social Security amount withheld from your paycheck by your total gross income for the pay period. If it’s not 4.2%, notify your employer immediately. There should be no need for you to update your W-4 form.
What does this mean for my employer?
Other than adjusting your paycheck, the change does not impact your employer, who will continue to have to pay your Social Security payroll tax at a rate of 6.2%.
What if I’m self-employed? Do I benefit at all from the tax cut?
Yes! With the Social Security tax reduction, your self-employment tax falls from 15.3% to 13.3%. And you’re still able to deduct 50% of your self-employment tax when calculating your adjusted gross income on your tax return.
About the Writer
Susan Ladika has been a writer and editor for 25 years. Her freelance work has covered everything from business to travel to science to international issues, and have appeared in such publications as Science, Town & Country, HR Magazine, Developer, The Wall Street Journal-Europe, The San Francisco Chronicle, and many others. She has also done extensive editing as a newspaper and wire service editor holding positions such as the Tampa Tribune Bureau Chief.
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