IRS Issues New Employer Withholding Tax Instructions

by Mike Godfrey, Tax-News.com, Washington

21 December 2010

The United States’ Internal Revenue Service (IRS) has released instructions to help employers implement the 2011 cut in payroll taxes, along with new income tax withholding tables that employers will use during 2011.

The IRS pointed out that millions of workers will see their take-home pay rise during 2011 because the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, which has now been signed by President Obama, provides a 2% payroll tax cut for employees, reducing their social security tax withholding rate from 6.2% to 4.2% of wages paid. However, it was confirmed that this reduced social security withholding will have no effect on the employee’s future Social Security benefits.

Notice 1036, released by the IRS, contains the percentage method income tax withholding tables, the lower social security withholding rate, and related information that most employers need to implement these changes. The IRS said that it recognizes that the late enactment of these changes makes it difficult for many employers to quickly update their withholding systems.

However, employers should start using the new withholding tables and reducing the amount of social security tax withheld as soon as possible in 2011, but not later than January 31, 2011. For any Social Security tax over withheld during January, employers should make an offsetting adjustment in workers’ pay as soon as possible but not later than March 31, 2011.

Employers and payroll companies will handle the withholding changes, so workers typically won’t need to take any additional action, such as filling out a new W-4 withholding form. As always, however, the IRS urges workers to review their withholding every year and, if necessary, fill out a new W-4 and give it to their employer.

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