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January 11, 2011

Mind Blowing 2011 IRS FICA Change For Micro-enterprises and All Business Ventures

On December 17, 2010, The Tax Relief Act 2010 was signed into law. This was the same piece of legislation that extended the Bush era tax credits. But the unique part is for the first time in my professional career, the Social Security tax was lowered to 4.2% for employees only. The Entrepreneur’s Advisor wants to make sure that you are ready.

Is Your Business Ready for 2011 Tax Changes

Is Your Business Ready for 2011 Tax Changes

What does this mean for Entrepreneurs and Professional Practice Employers

FICA taxes contain 2 parts. The first is a Social Security tax which has been at 6.2% for many years and the second is the Medicare tax which remains at 1.45%. The combination was the 7.65% that employers are required to withhold from all employee wages.

For 2011 only, employers are to reduce the social security portion for employees to 4.2% thus making the effective FICA taxes = 5.65%. The employer taxes remain the same at 7.65%. Because of the late passage of the Tax Relief Act of 2010, employers have until January 31 to adjust employee’s tax withholdings.

This may lead to a lot of confusion as some organizations may have already done their first couple of payrolls for 2011. In the situation that employees have had the wrong (too much) tax withheld from their paychecks, the IRS Circular E says the 2% refund to employees should be included in their next pay period.

The IRS was unclear how employers will get back any over payment to the IRS if that have already been required to make a tax deposit in 2011. Fortunately, for many entrepreneurs and micro-enterprises the next day tax deposit threshold is probably not an issue.

Of very important note, the tax change is only for 2011. Therefore, great care must be given to the timing of end of the year payroll and bonuses. I am not a tax expert, but I think that there may be an issue with employees who find their final pay period of the year 2011 reflects the increase scheduled for 2012. Tax liability goes by check date not by the pay period. Take the time to explain this to your employees.

Other Payroll Tax Changes for 2011 Affecting Business Ventures

  • Withholding tables were also adjusted. The combination of changes probably has a negligible effect on most employees final net pay.
  • The Making Work Pay credit expired on December 31, 2010
  • COBRA premium assistance has been extended
  • Changes were made to advance payment of Earned Income Credit (EIC)
  • Federal tax deposits must all be made electronically.
  • The Federal Unemployment Tax Rate (FUTA) is scheduled to decrease June 30th to 6.0%

Reference Sources for The Tax Relief Act of 2010

The following sites contain some very good advice as well as the documentation that you should be familiar with:

What to Do If You Don’t Understand What To Do Next

Payroll can be a time consuming function of any business. For small business there are other options especially since all Federal tax deposits are now required to be made electronically. Choices include talking or hiring a CPA to make you are in compliance or outsourcing your payroll to a professional payroll processor such as Paychex or ADP.

Outsourcing your payroll function gives you more time to concentrate on growing your business. Tell us how you will handle the payroll changes for 2011.

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