Highlights important 2011 federal payroll tax changes

Here is a summary of some important changes to federal payroll tax laws and figures, that are effective Jan. 1, 2011.

Withholding Tax.

New federal withholding tables have been issued. An annual federal withholding allowance is now valued at $3,700 (previously, $3,650).
The Social Security withholding tax rate on wages earned by employees has been temporarily lowered from 6.2% to 4.2% for one year, effective with wages earned beginning Jan. 1, 2011. The IRS is advising employers to implement the 4.2% employee Social Security rate as soon as possible, but no later than Jan. 31, 2011. The maximum benefit that a worker will receive from the tax rate reduction is $2,136 (i.e., $106,800 Social Security wage base × 2%). Employers will continue to pay Social Security taxes at a 6.2% rate.
Employers must make all federal tax deposits (FTDs) by electronic funds transfer (EFT), effective Jan. 1, 2011. FTDs can no longer be made on paper tax deposit coupons (Forms 8109 and 8109-B).
Employees may no longer receive the “Making Work Pay” credit in 2011. This refundable income tax credit was available to individuals below a certain income tax level on their 2009 and 2010 personal income tax returns. Employees received the credit incrementally through a reduction in the amount withheld from their paychecks.
Employees may no longer choose to get part of the earned income credit (EIC) in advance with their paycheck (known as the “advance earned income credit”). The IRS is advising employees with income tax withholding in 2011 who expect to be eligible for the EIC to consider reducing their withholding in order to receive a portion of the credit throughout the year.

Fringe Benefits.

Effective Jan. 1, 2011, the standard mileage rate for computing the deductible cost of operating a car (including vans, pickups, or panel trucks) for business use is 51 cents per mile (previously, 50 cents per mile).
An employee may exclude up to $230 a month for qualified parking expenses in 2011, and up to $230 a month for the combined value of transit passes and transportation in a commuter highway vehicle.
The maximum amount that can be excluded from an employee's gross income in connection with the adoption by the employee of a child (whether or not he or she has special needs) is limited to $13,360 in 2011.

Pension Plan Limitations.

The maximum amount that an employee may elect to defer to an IRC §401(k) cash or deferred compensation plan continues to be $16,500 in the 2011 tax year. The maximum amount that an employee/participant may elect to defer to a savings incentive match plan for employees (SIMPLE plan) is still $11,500. The limitation on total annual contributions to defined contribution plans is $49,000 (unchanged from 2010). The annual benefit limit for defined benefit plans remains at $195,000. The limitation on deferrals for IRC §457 deferred compensation plans of state and local governments and tax-exempt organizations remains at $16,500. The limitation used in the definition of a highly compensated employee is still $110,000 (unchanged from 2010).
The maximum aggregate annual contribution that can be made to a health savings account remains at $3,050 for self-only coverage and $6,150 for family coverage in 2011.
The employee compensation amount used in the definition of “control employee” for purposes of the auto commuting valuation rule continues to be $195,000 in 2011. The compensation amount used in the definition of company officers who are ineligible for the commuting valuation rule is still $95,000 in 2011.

Federal Minimum Wage Rate.

The federal minimum wage rate is still $7.25 per hour in 2011.
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