Don’t be surprised if your first paycheck for 2011 wages looks like you got a raise.  The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 recently signed into a law that provides a one-year payroll tax cut for employees who pay Social Security tax.  This immediate tax benefit was included in the new law along with a two-year extension of the Bush-era individual and capital gains/dividends tax cuts and reinstatement of some other expiring tax deductions and credits.

The 2010 Tax Relief Act reduces the employee share of the OASDI portion of Social Security taxes from 6.2 percent to 4.2 percent for wages earned in the 2011 calendar year up to the taxable wage base of $106,800.  Self-employed individuals will pay 10.4 percent on self-employment income up to this threshold.  The 2 percent OASDI reduction is available to all qualifying wage earners with no income limitation phase out.

Although the employer’s share of OASDI remains at 6.2 percent for 2010, certain employers may be eligible for payroll tax forgiveness under the Hiring Incentives to Restore Employment (HIRE) Act.  See www.irs.gov for more details.

Individuals who do not pay into Social Security, such as some public employees, will not benefit from the payroll tax cut.  Also the 2010 Tax Relief Act did not change the Medicare portion of Social Security tax rate of 2.9 percent (1.45 percent each for employer and employee).