Newly Enacted Tax Legislation to Affect Employers on January 1st
On December 17, 2010, President Obama signed into law H.R. 4853, the Tax Relief Unemployment Insurance Re-authorization and Job Creation Act Of 2010, which will affect every U.S. employer and several areas of payroll, tax and benefits administration in January.
The most significant provisions involving payroll administration include:
- The so-called Bush Tax Cuts enacted in 2001 and 2003 have been extended at all income levels through 2012. Without this legislation, federal withholding would have increased substantially on January 1, 2011.
- Specifically, the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”) created a 10-percent income tax bracket, and reduced income tax rates of 28 percent, 31 percent, 36 percent and 39.6 percent to 25 percent, 28 percent, 33 percent, and 35 percent, respectively. The new law in effect generally keeps income tax rates at the same levels as those in effect for 2010.
- The employee Social Security tax rate for wages paid in 2011 has been reduced to 4.2 percent from 6.2 percent. The Social Security wage base remains $106,800, and the employer Social Security tax rate remains 6.2 percent. The maximum Social Security withholding for 2011 will be $4,485.60, compared to $6,621.60 for 2010.
- Employer-provided Educational Assistance under IRC §127 was scheduled to expire after 2010. The new law extends IRC §127 tax benefits through 2012. Up to $5,250 annually of educational assistance provided by an employer to an employee is excluded from gross income for income tax purposes and from wages for employment tax purposes. This exclusion applies to both graduate and undergraduate courses.
- Employer-provided Adoption Assistance is also extended for one year (2012). Adoption credit and exclusion from income for employer-provided adoption assistance provided a maximum adoption credit and a maximum exclusion of $13,170 per eligible child. After 2011, the maximum credit and exclusion would have been reduced to $6,000. The new law extends these benefits for one year. For 2012, the maximum benefit is $12,170 (indexed for inflation).
- Employer-provided Child Care Tax Credit: Employers may receive a tax credit for eligible employer-provided child care expenses. This tax credit would have expired after 2010, but is now extended through 2012.
- The Act also maintains tax parity for Qualified Transportation Fringe Benefits under IRC §132 for employer-provided mass transit and parking benefits.
- Qualified transportation benefits include parking, transit passes, van-pool benefits, and qualified bicycle commuting reimbursements. The American Recovery and Reinvestment Act of 2009 increased the monthly exclusion for employer-provided van-pool and transit pass benefits to the same level as the exclusion for employer-provided parking ($230 for 2010). The ARRA limits were set to expire on December 31, 2010. The provision extends the parity in qualified transportation fringe benefits through 2011.
- The employer wage credit for Military Differential Pay was also extended for eligible small businesses. These employers are allowed to take a credit against income tax liability of 20 percent of differential wage payments to qualified active duty members of the uniformed services. The credit was to expire after 2010, but is now extended to amounts paid in 2011.
- Empowerment Zone Tax Incentives, including the income tax credit for hiring qualifying employees, were extended through 2011. A 20-percent credit is available to employers for the first $15,000 of qualified wages paid to each employee (i.e., a maximum credit of $3,000 per qualified employee).
- The Work Opportunity Tax Credit (WOTC) was scheduled to expire after August 2011, but is now extended for individuals who begin work for an employer before January 1, 2012. WOTC generally provides for tax credits of 40 percent of qualified first-year wages up to $6,000; i.e., a maximum per-employee credit of $2,400.
- Those employers utilizing ADP’s payroll service are well positioned to seamlessly remain in compliance with these and many other provisions in the Tax Relief Unemployment Insurance Re-authorization and Job Creation Act Of 2010.
Employers may want to consider adding brief explanations to initial 2011 paychecks. The Making Work Pay Tax Credit, a credit of roughly $400 per worker built into the federal tax tables, will expire after December 31, so some workers may inquire about a small increase in income tax withholding, and/or the reduced Social Security tax withheld.
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