A New Year’s Gift from Uncle Sam

Effective January 1, 2011, your W-2 gross income, less any flexible spending account deductions, will be calculated on a reduced Social Security payroll tax. Plainly speaking, your paycheck deduction for Social Security will be at 4.2 percent rather than 6.2 percent.  These taxes apply to your annual gross salary up to $106,800. As long as you make less than that amount, your salary will be based on a 4.2 percent payroll tax. If it is more than that, there are no tax savings on the amount over and above the threshold.

So, just to help you get started on how the increase is going to affect you, I've prepared a little chart for you[1]:

The above examples include $2,500 deducted each year for a medical or childcare reimbursement account. These accounts are not subject to Social Security payroll taxes. The pay period in each one is based on a bi-weekly payroll

You might not see the increase in cash in your first two paychecks since the government is giving payroll departments and payroll services time to implement the change. Because the law was signed late on Dec. 17, there may not be enough time for every company to have the new calculation implemented in their systems. There will be a correction made to ensure each worker receives the right amount of money if the first couple of pay periods are missed and every payroll should be in place by January 31, 2011.

If you want to check out some calculations for yourself, Kiplinger.com has an easy to use calculator and you can enter what is applicable to you and get an exact amount you can expect to see on a consistent basis in your paycheck.

The government is hoping to re-stimulate the economy and give American families money they can use to pay for the rise in the cost of goods. There is also the opportunity to offset additional taxes by putting this increase into your tax-deferred savings account.

I wish everyone a truly Happy New Year!

[1] http://www.kiplinger.com/features/archives/how-tax-cut-boosts-your-paych...