One of the most prominent features of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 is the one-year “payroll tax holiday” for 2011—a two-percentage-point reduction in payroll tax for employees. According to an IRS news release, this reduction will cause the take-home pay of millions of workers to increase in 2011.However, the corresponding termination of the making work pay (MWPC) largely negates any positive effect of the payroll tax reduction on many workers’ paychecks, and even subjects some low-income workers to greater withholding than they faced in 2010.
Did you hear that? You are having 2% less in Social Security withheld & subsequently put into your Social Security account for when you retire and you are still going to have less money to take home? That’s because the $400 credit you were receiving on page 2 of your Form 1040 has gone away.
Effect of the 2% Social Security reduction. In general, for 2011, taxpayers with incomes below $20,000 will pay more tax and have higher withholding than in 2010, whereas taxpayers with greater incomes will enjoy reductions. ($20,000 × .02 = $400)
Illustration : A single taxpayer with wages of $250 per week had $31.40 withheld from each paycheck in 2010, which will rise to $33.80 in 2011. However, if the single taxpayer instead made $1,000 per week, his withholding would drop from $221.10 per week in 2010 to $207.40 in 2011.
Observation: A taxpayer who receives wages of $35,000 per year ($673.07 per week) will see some reduction in his weekly withholding from 2010 to 2011—from $121.09 to $115.03. However, this reduction may well be less than the taxpayer anticipated.
Thus, for 2011, low-income taxpayers are hit hardest by the increased income tax withholding. For taxpayers with higher incomes, the loss of the $400 credit is mitigated by the 2-point Social Security reduction. However, this reduction is only in effect for 2011. Absent Congressional action, the increase will have a greater impact in 2012 on all taxpayers who received any benefit from the Making Work Pay Credit.