Incremental Savings due to Social Security Adjustment

Putting That Tax Holiday to Work in 2011

Incremental savings, not thrilling by any measure, are better than a tax increase...I am just not sure the federal government has this idea right? Last year, the withholding rates were adjusted and the sluggish economy remained. I, personally, am not sure that such a small adjustment will have the effects that are desired.

Thanks to the tax bill that President Obama signed a week ago, a large number of Americans will get a year-long discount on their payroll taxes in 2011. Normally, employees pay 6.2 percent of their salaries, up to a $106,800 limit, toward Social Security. In 2011, that number will fall to 4.2 percent.

As a result, individuals could end up with a payroll tax savings of up to $2,136 in 2011. Downside is that the most an individual can recover ($2,136 for an individual earning over $100,000) is $41 a week. Households with two wage earners who both make more than $106,800 will get $4,272 (or $82 a week), double the amount for individuals. If you make under $100,000 a year, the tax savings reduces proportionately. $75,000 turns into $1,500 or $28.85 a week and $50,000 equates to $900 a month or $17.31 more a week.

The self-employed will share in the year-long tax holiday as well, though they will still be on the hook for the full 6.2 percent of the employer contribution to Social Security. As a result, they’ll pay 10.4 percent in payroll taxes instead of the usual 12.4 percent.

The payroll tax break is a handout worth about $120 billion, according to the White House. And the administration hopes that you will spend every cent to help get the economy going again. In fact, the tax break was designed with just that in mind. When money dribbles into a paycheck, as this tax break will for many millions of workers, they tend not to save it in the same way that they might if it came in the form of a lump-sum check.