How the 2011 Tax Changes Affected My Take Home Pay

One of my many tasks for my employer is to process the payroll and print out checks.  Since we are all salaried and paid twice a month, this is usually an easy and -  dare I say – almost boring task since usually everything stays the same month after month. However, the first payroll run of the year added some excitement and was actually a bit of a challenge because of the 2011 tax changes, namely the federal income tax and the decrease in Social Security deductions meant that everyone’s check would need to be recalculated with the new data.  Since we do have an electronic accounting system, this is done automatically once we install the payroll module updates, but in addition to our accounting system we keep a payroll recap in an Excel spreadsheet so that we can verify the two against each other and make sure that we haven’t forgotten something.  I have caught mistakes enough times to recognize the necessity of having a secondary way to check the calculations.

There was also the question as to whether we would see an increase in pay.  Two departments have already received a raise, and the remainder of staff typically receives its raise in January.  We had to wait until the board had their monthly meeting in order to find out if the rest of us could expect more in our checks.   As it turns out, we waited for nothing, as the executive board members were not present to discuss this topic.  We were told they would discuss it soon, and raises would be retroactive for January if approved.

When I first saw that we were going to be paying less into Social Security (this seems like a bad idea to me) I thought we would end up with an increase in our paycheck, but when I started the payroll process I saw that the federal taxes had increased for every staff member.   I keep reading that the Bush Tax Cuts will be extended and that Obama’s 2011 budget does not include tax increases for single persons making less than $200,00 and couples making less than $250,000.  In turn, I expected the federal tax deductions to remain stationary.  Instead, check out what I found. This an image with some sample numbers comparing the deductions of 2010 to 2011, according to the IRS tax instructions booklet for employers, Circular E.

Federal Tax Withholding Comparison 2010 to 2011

Federal Tax Withholding Comparison 2010 to 2011

As you can see, a single person with no exemptions making $495 twice monthly used to pay $27.00 in federal incomes taxes, but is now required to pay $43.50.  Last year they were paying 5.45% of their gross towards federal, but now they are paying 8.79%.

All the annual wages are well under $200,000.  I guess I don’t know what the “Bush tax cuts” actually entail… apparently they and President Obama’s claim that he wouldn’t raise taxes for folks making less than $200,000 in reality has nothing to do with federal income taxes. Someone care to enlighten me?

For my own paycheck, because 2% less than usual will be removed for Social Security, in spite of the increased federal withholding, I will be taking home an additional $34 each month. I decided to have my savings deduction increased so that I won’t see the money in my take home pay.

I also discovered that the option to take Advanced Estimated Tax Payments ended on December 31st, 2010.   We have never even looked into this option until just this month when one of our employees could have benefited from it. When I started researching I found it’s not an option any longer.  The recommendation is to simply have less money removed from one’s federal withholding.

In other interesting lists for 2011, here is a list of the stock market holidays.  My frugal grandmother told me once upon a time that she played the stock market, but she never went into any details.  I think she just worked hard and was extremely frugal.

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15 comments to How the 2011 Tax Changes Affected My Take Home Pay

  • We get paid on the last business day of the month so I have not seen a paycheck as yet. We were informed by the payroll department that with the new tax tables people will actually see a decrease in their paychecks so be prepared for a few dollars less per check.

    I am (not) eagerly awaiting the end of the month to see what the actual amount will be.

    [Reply]

    Mrs. Accountability Reply:

    @Lulu, well you have only a couple more days to wait. In the future you can figure this out yourself provided you know your filing status and exemptions. This will all be on the W4 that employers are required to get from each employee. Then you just go to irs.gov and find Circular E for Employers and then check the withholding tables. Anyway, hope you don’t get too much of a decrease. I’m glad your employer notifies you. We aren’t told anything like that. I think it’s just bad HR from the offices above me. I know when it’s going to happen but don’t really have permission to send out a letter to let everyone know. I should probably at least ASK if I could send out a letter explaining what has happened. Good luck.

    [Reply]

  • I was pleasantly surprised when I saw the increase in my wife’s paycheck. I am ineligible because I am in a state pension. This will fund our 2011 IRA/Roth IRA.

    [Reply]

    Mrs. Accountability Reply:

    @krantcents, well that’s good that she came out ahead! Glad to hear it!

    [Reply]

  • @krantcents / Great idea! I need to be better at contributing to my Roth IRA throughout the year rather than one lump sum. I think it will be less painful that way.

    [Reply]

  • Candace

    Several of the personal finance bloggers have stated higher withholding is a result of the “making work pay” credit ending December 2010.

    [Reply]

    Mrs. Accountability Reply:

    @Candace, I see. I had not read that. I went in search of an answer before I started my blog post over at the IRS but they had nothing, at least that I could find. Maybe they will explain it eventually. Usually they do. Thanks for the info!

    [Reply]

  • As Candace said, this is due to Making Work Pay being in place in 2010 (as a one time thing) and not in 2011. The means that some on the lower end of the income scale may see their take home decrease, as the credit for Making Work Pay exceeds 2% of their income.

    The decrease in withholding for OASDI basically offset the increased cost in health insurance (wife is on my plan this year due to some big changes in her employer’s benefits), so my check basically stayed the same.

    [Reply]

    Mrs. Accountability Reply:

    @Kosmo, oh. Is that what happened? I found it so odd that we didn’t get notification by mail from the Feds. They always send my boss some kind of documentation when things change. I think I did read somewhere that we would get something in the mail in February, but if we didn’t make the change for January we’d have to do that retroactively. Guess the changes were made so recently that it was hard to send out those notices in a timely matter. Thanks for your comment!

    [Reply]

  • I have yet to see my first paycheck reflecting these adjustments…guess it’ll be here next Friday. But I do recall that I benefited from the Making Work Pay thing, so I suppose now that it’s gone, my net pay will go down. Again. {sigh}

    [Reply]

    Mrs. Accountability Reply:

    @Funny about Money, you know it isn’t too hard to calculate what you should be taking home, so long as you know the gross amount. 4.2% for SS, 1.45% for Medicare and you can find the Federal % by going to irs.gov and looking at the tables in the booklet Circular E for Employers. At any rate, you probably already got your check so you already know if/how you were affected. I hope you didn’t get hit too hard.

    [Reply]

  • Very interesting story! Thanks for submitting to the Carnival of Money Stories this week!

    As a graduate research assistant in graduate school, I pay so little in taxes anyway that I don’t see that much of a difference!

    That is wild though that it is so complicated! I guess it’s a lesson in being careful how we interpret what the politicians are promising…

    [Reply]

    Mrs. Accountability Reply:

    @Jacob @ My Personal Finance Journey, it’s actually not so bad once you understand what is going on. I’m glad that you don’t yet have to worry about too many taxes. :-)

    [Reply]

  • celticblueiwolf

    With all due respect, I am just puzzled by this line:

    When I first saw that we were going to be paying less into Social Security (this seems like a bad idea to me)

    You did state that you had it then go directly into a deduction for your IRA. Now that is a good idea, especially when your present deductions pay only the present SS receivers. When your time comes, the workforce will be less most likely. In other words, most of us believe we will not see any SS at all. So why not be for a less % going toward it presently and support as much as possible of it being available so then you can set it aside for your IRA. Seems like a win win situation to me.

    [Reply]

    Mrs. Accountability Reply:

    @celticblueiwolf, thank you for your polite comment. I agree that Social Security will more than likely not be around by the time I am retirement age, but it seems to me as if paying less into Social Security by today’s workforce is making things worse and essentially an active move to collapsing the system. Regarding the “savings” I mentioned, that is not an IRA. It is our savings account for upcoming necessary purchases like tires, auto insurance, and the like so that we don’t have to increase our credit card debt.

    [Reply]

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