How to Calculate Free Payroll Tax

by James Collins

At the end of 2010, Republicans and Democrats were arguing over the repeal of tax cuts for Americans earning more than $1 million a year, a group that represents less than 1 percent of the population. The Obama administration reluctantly allowed an extension of the repeal deadline in exchange for a 2 percent reduction in the Social Security payroll tax for 2011. This tax cut reportedly will put back about $110 billion into taxpayers' hands.

Obtain your payroll statement from December 2010.

Identify the amount of money paid out to FICA in your payroll taxes. FICA stands for the Federal Insurance Contributions Act and comprises both Social Security and Medicare taxes. The FICA tax rate on your earnings has been 6.2 percent for Social Security and 1.45 percent for Medicare, for a total of 7.65 percent. For 2011, the Social Security tax has been reduced by 2 percent to 4.2 percent, for a total FICA tax of 5.65 percent. So essentially 2 percent of the payroll tax is free for the year, compared with 2010.

Calculate the amount of your salary that you will get to keep in 2011 instead of paying in FICA taxes. You can check the amount by multiplying your pay-period paycheck amount before taxes by 2 percent. For example, if your pretax income is $1,000 every pay period, your payroll tax savings are .02 times $1,000, or $20.

About the Author

James Collins has worked as a freelance writer since 2005. His work appears online, focusing on business and financial topics. He holds a Bachelor of Science in horticulture science from Pennsylvania State University.

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