congress-passes-tax-cut.pngThe House of Representatives late Thursday approved legislation that President Obama and Republican leaders earlier this month agreed upon that will extend Bush-era income tax rates for two years for all income levels, create a payroll tax holiday for workers and extend unemployment insurance benefits. The $858 billion package measure, which includes a number of other tax-related provisions, now goes to the President who is expected to sign it into law in the next day or so.

The House vote was 277 to 148, following Senate approval earlier this week by a vote of 81 to 19. After months of intense partisan battles on economic stimulus and healthcare reform legislation, the tax cut bill represents the most important bipartisan legislative achievement of the Obama presidency. Read more.

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Congress passes tax cut package to spur economic growth

Fri Dec 17, 2010

congress-passes-tax-cut.pngThe House of Representatives late Thursday approved legislation that President Obama and Republican leaders earlier this month agreed upon that will extend Bush-era income tax rates for two years for all income levels, create a payroll tax holiday for workers and extend unemployment insurance benefits. The $858 billion package measure, which includes a number of other tax-related provisions, now goes to the President who is expected to sign it into law in the next day or so.

The House vote was 277 to 148, following Senate approval earlier this week by a vote of 81 to 19. After months of intense partisan battles on economic stimulus and healthcare reform legislation, the tax cut bill represents the most important bipartisan legislative achievement of the Obama presidency.

Regarding the payroll tax holiday, the tax cut package reduces the employee share of Social Security payroll taxes from 6.2% to 4.2%, for a total employer-employee Social Security tax of 10.4% for all of 2011. The annual Social Security wage limit is $106,800 for 2011, making the maximum tax saving for workers $2,136. The one-year holiday will cost the US Treasury some $120 billion.

In guidance promulgated Dec 17, Treasury and the IRS seem to appreciate the pressures employers face to meet year-end deadlines as well as reflect the new tax legislation in employee paychecks.

“Employers should implement the 4.2% employee social security tax rate as soon as possible, but not later than January 31, 2011. After implementing the new rate, employers should make an offsetting adjustment in a subsequent pay period to correct any over withholding of social security tax as soon as possible, but not later than March 31, 2011.”

It’s important to note that the 2 percentage point reduction in employee Social Security taxes replaces two other 2010 tax breaks—the “Making Work Pay” tax credit and the HIRE Act employer Social Security tax holiday.

The Making Work Pay tax credit, first enacted as part of the 2009 economic stimulus package, provided a 6.2% tax credit on the first $8,000 of federal income tax wages for individuals and the first $16,000 of such wages for joint filers. The maximum credit was $400 for individuals and $800 for couples and phased out at $75,000 for individuals and $150,000 for joint filers.

The HIRE Act exempted Social Security wages paid to qualifying employees from the employer’s share (6.2%) of the Social Security tax. Qualifying employees are individuals who have been unemployed for more than 60 days. The early-2010 legislation also provides for a “retention credit” in 2011 for employers who retain new hires for 52 weeks.

Our understanding is that neither of these tax breaks will be continued in 2011, though employers can still claim the retention tax credit. President Obama and Congress decided this time to temporarily cut employee payroll taxes as the most direct way to boost after-tax incomes.

Taken together, the newly passed tax cut legislation, while it will add hundreds of billions to the budget deficit, is expected to spur growth and create jobs—#1 challenge facing the U.S. economy in 2011.