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Why You May See a Change in your 2011 Payments and Withholding

Employees and Retirees May See Changes to their Net Pay in 2011

The Tax Relief Act passed by Congress in December 2010 included some changes that will impact the take-home pay for workers and retiree pension checks in 2011. The income tax rates that were scheduled to expire on 12/31/2010 were extended for two more years, which prevented a large increase in federal income taxes that would have begun in January of 2011.

Under the Tax Relief Act, withholding for social security tax for all wage earners was reduced from 6.2% to 4.2% (withholding for Medicare, at 1.45%, did not change). For most employees, this will result in less total tax being withheld from their paychecks. The social security tax reduction does not affect pension payments, but most workers will see their take-home pay increase.

Along with maintaining the lower tax rates, what may affect retirees is the Making Work Pay (MWP) tax credit, which was not extended past 2010. Any retirees who also have wages or other earned income in 2011 will no longer get the benefit of the MWP credit.

Because the Tax Relief Act was enacted so late in 2010, the IRS gave employers and pension plan administrators until January 31, 2011 to adjust their payment systems. That means some people won’t see the full effect of these tax changes until their first paycheck in February 2011.

As noted above, most workers will see their take-home pay increase, but pensioners may find their payments are lower depending upon the method that their plan administrators used to calculate withholding in 2010. 

Because the MWP credit did not apply to pensioners, the IRS published a table for 2009 and 2010 giving plan administrators the option of increasing withholding for their pension recipients. Not all plan administrators made the optional adjustment and instead allowed pensioners to make the adjustment when they filed their tax returns. Since the 2011 withholding tables do not reflect the expired credit, pension recipients in this situation are likely to see the withholding for their 2011 pension payments increase by approximately $7 to $50 per payment, depending on filing status, the amount of the payment, and how often the payment is made.

Please contact our tax professionals at 877.517.6872 if you have questions about this, or any other tax issues