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Time Is Short For Employers To Make Payroll Changes

After exhausting debate in the lame duck session of congress, President Obama signed the tax cut extension that former President George W. Bush enacted two years ago. The bill added a payroll tax cut that will boost take-home pay.

Taxpayers will see a two-percent reduction in Social Security withholding. Employee withholding will be 4.2% while the employer’s portion will remain at 6.2%.

This puts employer payroll departments in a rush to implement the change beginning January 2011.

The same day the bill was signed on December 17, the Internal Revenue Service released instructions to help employers implement the 2011 cut in payroll taxes. Employers also received the new income-tax withholding tables that they will use during 2011.

Millions of workers will see their take-home pay rise during 2011 because of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. The reduced Social Security withholding will have no effect on the employee’s future Social Security benefits.

The new law also maintains the income-tax rates that have been in effect in recent years.

Employers should start using the new withholding tables and reducing the amount of Social Security tax withheld as soon as possible.

The IRS recognized that the late enactment of these changes makes it difficult for many employers to quickly update their withholding systems. For that reason, the IRS asks employers to adjust their payroll systems as soon as possible, but not later than Jan. 31, 2011.

For any Social Security tax over withheld during January, employers are required to make an offsetting adjustment in workers’ pay no later than March 31, 2011.

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