The clock is ticking to process the new payroll tax cut for employees

Happy New Year, HR Forum readers! I hope you weathered every HR storm in 2010 with wisdom and finesse - and that 2011 brings you and your business continued growth and success. Check back here often for insight and guidance with the biggest challenges the new year throws our way. It's bound to be an interesting 12 months, with many twists and turns in the worlds of labor law, people management and HR. Together, we can tackle the toughest issues and map out the smartest solutions.

Now for the first topic this year ... taxes!

Thanks to the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, millions of employees will see a bump in their take-home pay this year. That’s because the recently passed Act provides a tax cut that reduces the Social Security (FICA) tax withholding rate from 6.2% to 4.2% of wages paid. For an employee earning up to the $106,800 taxable earnings cap, this 2% reduction amounts to a tax savings of $2,136.

While this is good news for employees, the change is putting employers in a bit of a bind to quickly implement the changes. The IRS is instructing employers to process the new withholding “as soon as possible in 2011 but not later than Jan 31, 2011.” If you accidentally process the payroll tax withholding at the higher 6.2% rate, you must reimburse employees the difference by March 31, 2011.

In addition to the reduced Social Security withholding, the IRS released new income-tax withholding tables for 2011. (The new law maintains the income-tax rates from recent years.)

Because employers and payroll companies must handle the withholding changes, employees won’t be required to take any additional action, such as filling out a new Form W-4

Please note: As soon as it is released by the federal government (usually in January of the new year), we will update the Form W-4 required by every employee to claim (or makes changes to) their tax withholdings.

The clock is ticking to process the new payroll tax cut for employees

A quick refresher of the Form W-4 tax-filing rules

In a recent review of the current Form W-4 (Employee’s Withholding Allowance Certificate) at the 28th Annual APA Congress in Washington, D.C., a handful of rules were revisited and reinforced. As a reminder:

• High school and college students are not automatically exempt from tax withholding, even if all the prior year’s taxes were refunded. In addition, students must meet all the same exemption tests as other employees.

• Employees claiming a withholding exemption must file a new Form W-4 every year.

• You may develop and use substitute Forms W-4, but you must also provide the table, worksheets and instructions contained in the form. You may not use a substitute developed by an employee, however.

• An electronic Form W-4 may be filed as long as it meets certain requirements.

• E-mails to change a Form W-4 are discouraged, as they are not a legitimate electronic system.

• Nonresident aliens filing Form W-4 have certain restrictions on their status, number of allowances and inability to claim the standard deduction.

Stock up on the required Form W-4 to meet the IRS filing requirements for new hires and tax status changes for current employees.

A quick refresher of the Form W-4 tax-filing rules