Where’s My Payroll Tax Holiday?

In 2011, you should see a 2 percent increase in your paycheck, in addition to any other raises you receive. You don’t have to do anything to get this windfall, and you’ll never have to pay it back or include it on your tax return. Your check will be a little bit bigger this year–with no fanfare or effort on your part.

Finally, some good financial news. And from the IRS, no less!

How the Payroll Tax Holiday Works

Normally, you contribute 6.2 percent of your wages or salary (up to $106,800) to Social Security. Your employer matches it with another 6.2 percent. You and your employer also each contribute to Medicare, which remains unchanged.

Starting in January, 2011, you only have to contribute 4.2 percent to Social Security, but your employer still pays 6.2 percent. All else being equal, you have 2 percent less withheld from your pay. Thus, you get a slightly fatter paycheck.

More good news: This temporary payroll tax reduction won’t change the calculations for your Social Security benefits after you retire in any way.

What If I Don’t See Any Difference?

First, check to see if you’re getting the payroll tax holiday. Multiply your gross pay for the pay period by 4.2 percent. This should equal your Social Security tax withheld on this check.

If you’re still having 6.2 percent withheld, don’t march on down to the payroll department just yet. January is a very busy time for payroll people and they just got news of the payroll tax holiday late last year. Software has to be adjusted and systems set in place to account for the changes. Give them time.

The IRS “asks” businesses to have the changes made by the end of January.

Don’t worry about losing your payroll tax holiday if it takes a few weeks for your employer to give it to you. They have until the end of March, 2011 to make any offsetting adjustments to make up for missed payroll tax deductions at the beginning of the year.

What Should I Do With the Extra Income?

The most important thing you can do with your payroll tax holiday is to not let it slip away! Calculate how much you are getting so it doesn’t just disappear into the black hole of the checking account. Consider using it to increase your 401(k) or similar plan contributions, especially if you are not taking advantage of all your employer’s matching contributions. Or set up an automatic transfer every payday to a savings account. If you have high interest debt, this is your chance to pay it down.

Come 2012, your payroll tax holiday will disappear. Make every dollar of it count while it’s here!