The tax skinny on this year's fatter paychecks

Woman using a computer

(ARA) — Wondering where that small increase in your paychecks came from? Take a closer look at your pay stub and you'll see that your Social Security taxes are 2 percent lower this year. The employee and self-employed portion of the FICA-OASDI Social Security taxes has been reduced to 4.2 percent for employees and 10.4 percent for self-employed.

The tax cut, also known as the payroll tax holiday, was part of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 passed in December 2010. Employers had until Jan. 31, 2011, to implement the cut.

There is a $106,800 income-earned limit, which means the maximum amount a worker can receive by the end of 2011 from the 2 percent reduction is $2,136.

The payroll tax holiday replaces the Making Work Pay Credit that expired at the end of 2010 that was also distributed in paychecks but through reduced federal withholding. The credit was worth 6.2 percent of your modified adjusted gross income, up to $400 ($800 for joint filers).

Whether your 2011 paychecks are bigger depends on your earned income and whether you received the Making Work Pay Credit last year. Taxpayers making $20,000 or more this year will receive larger paychecks this year because 2 percent of income exceeds the $400 Making Work Pay Credit. On the other hand, paychecks for lower income taxpayers earning less than $20,000 will be smaller because the $400 credit exceeds the 2 percent payroll tax holiday.

"Regardless of whether your paycheck amounts have changed, you should do two things," says Jessi Dolmage, spokesperson for TaxACT. "First, review your federal withholding. Since the Making Work Pay Credit expired, you may need to adjust your withholding. If you're self-employed, review your estimated tax payments.

"Second, if you received the Making Work Pay Credit last year, you still need to claim it on your federal return that's due by April 18, 2011," Dolmage continued. "Claiming the credit cancels out the reduced federal withholding in last year's paychecks."

The Making Work Pay Credit amount is figured on Schedule M for Forms 1040 and 1040A. If you're filing Form 1040-EZ, use the designated worksheet to figure the credit. The economic recovery payments and government retiree credit that factored into the Making Work Pay Credit on last year's return expired, so figuring this year's amount is easier.

Free tax preparation solutions, including TaxACT Free Federal Edition, guides you step-by-step through the Making Work Pay Credit and all tax law changes to help you maximize your credits and deductions. They can also help you figure your federal withholding and even complete a new Form W-4 that can be printed and turned into your employer.

For more information about the payroll tax holiday and Making Work Pay Credit, visit www.irs.gov, where you can also find a free withholding calculator. To take advantage of free tax preparation, printing and filing with TaxACT Free Federal Edition, go to www.taxact.com.

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Upcoming Tax Dates

January 1 Everyone
Federal Holiday (New Year's Day) - Details

January 12Employees who work for tips
If you received $20 or more in tips during December, report them to your employer - Details

January 12Communications and air transportation taxes under the alternative method.
Deposit the tax included in amounts billed or tickets sold during the first 15 days of December 2014.

January 14Regular method taxes
Deposit the tax for the last 16 days of December 2014.

January 15Individuals
Make a payment of your estimated tax for 2014 if you did not pay your income tax for the year through withholding (or did not pay in enough tax that way). Use Form 1040-ES - Details

January 15 Farmers & fishermen
Pay your estimated tax for 2014 using Form 1040-ES - Details

January 15 Social security, Medicare, and withheld income tax
If the monthly deposit rule applies, deposit the tax for payments in December 2014

January 15 Nonpayroll withholding.
If the monthly deposit rule applies, deposit the tax for payments in December 2014.

January 20 Everyone
Federal Holiday (Birthday of Martin Luther King, Jr./Inauguration Day) - Details

January 27 Communications and air transportation taxes under the alternative method.
Deposit the tax included in amounts billed or tickets sold during the last 16 days of December 2014.

January 29 — Regular method taxes
Deposit the tax for the first 15 days of January.

View More Tax Dates