Employers must implement the payroll tax cut and the new IRS tax withholding tables by January 31, 2011. The cut in payroll tax is a result of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.
The new legislation, signed into law on December 17, 2010, provides a 2 percentage point payroll tax cut for employees, reducing workers’ Social Security tax withholding rate from 6.2 percent to 4.2 percent of wages paid.
The new law also maintains the income-tax rates that have been in effect in recent years.
Employers must start using the new withholding tables and reducing the amount of Social Security tax withheld no later than Monday, January, 31, 2011.
After implementing the new 4.2% rate, employers should make an offsetting adjustment in a subsequent pay period to correct any overwithholding of social security tax as soon as possible, but not later than March 31, 2011.
This reduced Social Security withholding will not affect the employee’s future Social Security benefits.
For more information, see IRS Notice 1036.