Search Penny Hill Press

Monday, April 4, 2011

Federal Tax Withholding in 2011: Selected Issues for the 112th Congress

Gary Guenther
Analyst in Public Finance

Over the first few weeks of 2011, many employed, self-employed, and retired individuals from the public and private sectors discovered that the amount withheld from their paychecks and pension payments for federal income and employment taxes was larger or smaller than the amount that was withheld in 2010.

This report is intended to help Members of the 112
th Congress and their staff respond to questions from constituents about the reasons for the withholding changes. It examines the two main reasons for the changes: the Making Work Pay tax credit (MWPTC) that was available in 2009 and 2010 and the Social Security tax reduction for employees and the self-employed that is available in 2011. The report also compares the average benefits of each stimulus measure by income level and assesses their cost-effectiveness as tools for promoting growth in national income and employment.

The MWPTC was included in the first economic stimulus bill passed by the 111
th Congress (the American Recovery and Reinvestment Act of 2009 or ARRA, P.L. 111-5). It was intended to boost the after-tax income of low- and middle-income households. The credit was refundable and equal to the lesser of 6.2% of a taxpayer’s wage income or $400 for single filers and $800 for married couples filing jointly in 2009 and 2010. It was subject to two limitations: (1) the credit was reduced by the amount of any economic recovery payment or refundable credit received by an individual under ARRA, and (2) it was reduced by an amount equal to 2% of a recipient’s modified adjusted gross income in excess of $75,000 for single filers and $150,000 for joint filers. Congress designed the credit to be disbursed in small increments through reduced withholding. As a result, take-home pay for eligible single and joint filers was somewhat larger each payroll period in 2009 and 2010 than it otherwise would have been.

The MWPTC expired at the end of 2010 and has not been extended. In its place, through the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (TRUCJCA, P.L. 111-312), Congress established a reduction in the employee’s share of the Social Security tax from 6.2% to 4.2% for 2011 only. The reduction also applies to Social Security tax paid by selfemployed individuals. Like the MWPTC, the payroll tax holiday is intended to raise spending by low- to middle-income households by increasing their take-home pay each payroll period. Unlike the credit, however, the payroll tax holiday grants immediate benefits on workers at the bottom of the wage scale and raises the take-home pay of some of the workers and self-employed persons whose earned income was too high to benefit from the credit.

Because of ARRA and TRUCJCA, many taxpayers are experiencing a change in the amount withheld for federal taxes from their paychecks or pension payments in 2011. The expiration of the MWPTC, coupled with the implementation of the temporary payroll tax holiday for employees and the self-employed, has altered the formulas used to determine withholding. Consequently, employees and self-employed individuals with gross earned incomes below $20,000 will be worse off in 2011, whereas those with incomes above $20,000 will be better off. At the same time, many retired persons living off pension benefits alone are likely to experience a rise in federal withholding amounts, since their pension payments are subject to the same federal withholding tables as earned income.

Date of Report: March 28, 2011
Number of Pages: 13
Order Number: R41727
Price: $29.95

Follow us on TWITTER at or #CRSreports

Document available via e-mail as a pdf file or in paper form.
To order, e-mail
Penny Hill Press  or call us at 301-253-0881. Provide a Visa, MasterCard, American Express, or Discover card number, expiration date, and name on the card. Indicate whether you want e-mail or postal delivery. Phone orders are preferred and receive priority processing.