The Internal Revenue Service said in a notice that employers will have until Jan. 31 to withhold less from workers’ paychecks as part of a tax measure that President Barack Obama is set to sign into law.
The $858 billion tax-cut extension measure cleared by the U.S. House late last night cut the 6.2 percent Social Security payroll levy by 2 percentage points, at a $112 billion cost in 2011. Because the change came so late in the year, the IRS determined that employers needed extra time to prepare, the agency said in a statement today.
“For that reason, the agency asks employers to adjust their payroll systems as soon as possible, but not later than Jan. 31, 2011,” the statement said. For any over-withholding in January by employers that don’t adjust their systems by New Year’s Day, companies would have until March 31 to add more to workers’ paychecks to make up the difference.
Employers had expressed concern about the fast-moving change, saying they wouldn’t be able to comply with the law and adjust their systems quickly enough.
“Frankly, it’s amazing” that the notice was sent “before the president even signed it into law,” said Scott Mezistrano, senior director of government relations at the American Payroll Association, a San Antonio-based trade group that represents company payroll managers.
He said the withholding changes may present a particular challenge for some employers, especially those that shut down the week between Christmas and New Year’s. Those companies’ payroll managers will be processing the first checks of 2011 next week before going on hiatus, at the higher Social Security withholding rates.
"Obama just signed this bill into law, and now I’m the payroll manager and my phone’s ringing off the hook with questions from employees" about where their payroll tax cut is, Mezistrano said. “That’s already the most busy time of year for payroll managers, and this just adds another wrinkle.”
The Social Security tax will be levied on income up to $106,800 in 2011, which is unchanged from this year, the IRS said. Cutting the tax to 4.2 percent means that the maximum a worker would pay in Social Security tax next year is $4,485.80, according to the American Payroll Association -- a $2,136 decline from the maximum under current law.
The new tax law also maintains the current individual income tax rates of 10, 15, 25, 28, 33 and 35 percent through the end of 2012.
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