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Why Your Tax Withholding Went Up

Posted By Jim On 01/12/2011 @ 12:36 pm In Taxes | 11 Comments

There have been a lot of commenters wondering why their tax withholding went up this year after hearing about the stimulative 2% payroll tax holiday [3] passed last year. The 2% payroll tax holiday reduced the normally 6.2% Social Security withholding to only 4.2% but some people have seen their withholding go up. What gives?

Last year, the Making Work Pay credit [4] reduced everyone’s income tax by 6.2% up to $400. Anyone who earned over $6451 received a maximum $400. That credit expired this year and was effectively replaced by a 2% reduct that had a much higher ceiling, $2,136.

How the difference affects you:

  • If you earn more than $20,000, then you should see a reduction in your withholding because a 2% of $20,000 is $400.
  • If you earned less than $20,000 then you’ll see an increase in your withholding because the 6.2%, even with a $400 cap, is higher than the reduction of 2% in Social Security.

Finally, your employer may not have implemented the payroll tax holiday yet, the IRS gave them a January 31st to fix it with any differences reconciled by March 31st. While your Making Work Pay credit has definitely been removed, the payroll tax holiday may not be implemented yet.

Who said taxes weren’t fun?

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[3] 2% payroll tax holiday: http://www.bargaineering.com/articles/2011-stimulus-check-2-payroll-tax-holiday.html

[4] Making Work Pay credit: http://www.bargaineering.com/articles/make-work-pay-stimulus-chec-tax-credit.html

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