Payroll Requirement Extended by IRS

The IRS has extended the deadline to January 31, 2011 for employers to withhold less from their workers’ paychecks.  This reduction of withholding is part of a tax measure that the President is set to sign into law.  The reduction amounts to a cut of two percentage points to the 6.2% Social Security payroll levy, bringing the rate down to 4.2%.  The US House of Representatives recently passed the $858 billion tax cut extension that is estimated to cost the government about $112 billion in 2011.

The Social Security tax cut is meant for those who earn up to $106,800 in 2011.  This level is unchanged from this year.  According to the San Antonio-based American Payroll Association, cutting the withholding tax rate to 4.2% would mean that the maximum a worker would pay in Social Security tax in 2011 will be $4,485.60, which is 4.2% of $106,800.  This is a reduction of $2,136 from the maximum under the current law.

At the same time, under the new tax law the current individual income tax rates of 10, 15, 25, 28, 33 and 35% will be retained at least until the end of 2012.

The extension to the original deadline was granted because of the late notice given to employers.  The IRS felt that most employers would not be able to adjust their payroll systems on time to comply with the new regulations, especially those companies that are closed the week between Christmas and New Year’s Day.  The payroll managers of such companies would have made out their employees’ salary checks for the first weeks of 2011 at the higher Social Security withholding rate before going on holiday.

Scott Mezistrano, senior director for public relations at the American Payroll Association expressed his surprise that the notice was sent even before the President had signed the regulation into law.  As expected, most employers have expressed their concern over the fast moving change, saying they would not be able to adjust their systems on time.

For any employer who over-withholds in January 2011 onwards, they will be given until March 31 to add more to their workers’ salary checks to make up the difference.