The House of Representatives passed H.R. 4853, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Tax Relief Act of 2010), one day after the Senate. President Obama signed it Friday, December 17. The law will continue the Bush-era tax rates, which were set to expire, for two years, through December 31, 2012.
The law will also reduce the payroll social security tax rate paid by employees from 6.2 percent to 4.2 percent for payroll wages paid in 2011 and continue several expiring payroll-related tax breaks, including non-job-related employer-provided educational assistance, adoption assistance, qualified mass transit and the Work Opportunity Tax Credit.
Also in mid-December, the IRS released Notice 1036, containing the percentage method tables for federal income tax withholding from wages paid in 2011. In a news release, the IRS said it recognizes that the late enactment of the Tax Relief Act will make it difficult for many employers to update their withholding systems for the first payroll of 2011.
The IRS extended the amount of time given to make updates by asking employers to update their payroll systems as soon as possible, but not later than January 31, 2011. Employers should make an adjustment in employees’ pay as soon as possible, but not later than March 31, 2011, for any social security tax over-withheld during January.
Individual Tax Rates
Under the Tax Relief Act of 2010, the current tax rates of 10 percent, 15 percent, 25 percent, 28percent, 33 percent, and 35 percent will stay in effect through December 31, 2012. Without TRA 2010, the 10 percent rate would have been eliminated and other rates would have been 15 percent, 28 percent, 31 percent, 36 percent and 39.6 percent beginning January 1, 2011.
TRA 2010 also extends the marriage penalty relief which sets the standard deduction for married individuals filing jointly at double that for single individuals and widened the 15 percent tax bracket to twice the size for joint filers that it is for single individuals.
Payroll Tax Reduction for Employees
TRA 2010 changes the withholding of social security payroll taxes from employees’ wages by reducing the employee share of social security tax from 6.2 percent to 4.2 percent for the first $106,800 of wages paid in 2011. The maximum amount that can be withheld will be $4,485.60, a $2,136 decrease from the 2010 maximum of $6,621.60. Employers will continue to pay the full 6.2 percent payroll tax of their employees’ covered wages paid in 2011 for their share of social security taxes.
The HIRE Act, which exempted employers from paying their share of social security payroll taxes on the wages of certain employees hired after February 3, 2010, and before January 1, 2011, does not apply to wages paid after December 31, 2010. Self-employed individuals paying 12.4 percent of their income in social security taxes will pay 10.4 percent up to the $106,800 wage base.
Extension of Other Expiring Provisions
Also provided for by the TRA 2010 includes the extension of several payroll-related provisions that were set to expire on December 31, 2010, or during 2011:
- Employer-Provided Educational Assistance – Extended for two years, through December 31, 2012, the income exclusion is up to $5,250 of employer-provided undergraduate and graduate educational assistance.
- Mass Transit Parity Benefits – The increase in the maximum monthly income exclusion for employer-provided mass transit and vanpool benefits to the same amount as employer-provided parking benefits is extended for one year, through December 31, 2011.
- Employer-Provided Adoption Assistance – The income exclusion is extended for one year, through December 31, 2012, for up to $13,360 of employer-provided adoption assistance.
- Dependent Care Tax Credit – The increase in the maximum child care expenses that qualify for the dependent care tax credit from $2,400 for one child and $4,800 for two or more to $3,000 and $6,000 is extended for two years, through December 31, 2012.
- Work Opportunity Tax Credit – The Work Opportunity Tax Credit is extended for four months, through December 31, 2011, and is effective for employees hired after the TRA 2010 enactment date.