President Obama signed a tax bill into law about a week ago. The bill will allow a large number of Americans to get a year-long discount on their payroll taxes in 2011, its referred to as the "Payroll Tax Holiday." Normally, employees pay 6.2 percent of their gross compensation to the Social Security portion of FICA taxes, only the first $106,800 of your earned income is subjected to this tax. In 2011, that number will fall to 4.2 percent, a 2 percent reduction.
The self-employed while they will still be responsible for the 6.2 percent of the employer contribution to Social Security. However they'll pay 10.4 percent in payroll taxes instead of the usual 12.4 percent.
According to the White House, the payroll tax break is a handout worth about $120 billion. The administration, hopes that the money saved will be spent to help get the economy going again. The idea behind the "Tax Holiday" is that if a small amount of money trickles into a paycheck, many will spend it, as most tend to save the lump-sum check they receive after filing their taxes.
The bottom line here is that most workers will see their paychecks grow by 2% as we head into 2011 .
So, when will you see the extra 2% in your paycheck?
Typically the payroll tax is taken care of by your employer. As an employee you shouldn't need to take any action.
Employers have until January 31, 2011 to put in the place the new payroll tax rate of 4.2%. Any adjustments or corrections will have to be made by March 31. So you should start seeing it shortly after the new year. If you haven't seen the changes in your paycheck by February, you may want to ask your HR department when the change will happen.
So how much of an increase will you see?
Kiplinger's has a calculator on its web site that can help you figure out how much of an increase you will see in your weekly/bi-weekly paycheck. Click here to check out the calculator. But be aware of the fact that the calculator only covers the 2011 tax cut. It doesn't account for the $400 maximum per person you may lose if you qualified in 2010 for all or part of the Making Work Pay tax credit.
What are your thoughts on the new payroll tax holiday? Do you think it will be effective in giving that boost to the economy? Leave us your thoughts in the comments below and be sure to vote in our webpoll.