For most employees, the net effect of the changes under the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, will mean less total tax being withheld from their checks. Under the Act, enacted on December 17, 2010, the income tax rates that were scheduled to expire at the end of 2010 were extended for an additional two years. These extended rates range from 10% to 35%. If the Act had not passed, the rates would have reverted to their previous higher levels of 15% to 39.6%. The Tax Relief Act also reduces the employee portion of Social Security taxes from the current 6.2% to a temporary rate of 4.2% for 2011 only. The employer portion is the same at 6.2% and Medicare taxes remain at 1.45%. So, the total self-employment tax rate, which was 15.3%, is temporarily reduced to 13.3% for 2011. The Making Work Pay (MWP) credit that was available for tax years 2009 and 2010 was not extended under the new law. The net effect of these changes--reducing the employee portion of Social Security taxes and taking away the MWP credit--will result in a net increase in take-home pay for most employees.
The IRS has asked employers to adjust their systems as soon as possible but no later than January 31, 2011. Many employees may not see these changes until their first paycheck in February 2011.