CCH Says History May Repeat Itself for the Payroll Industry

RIVERWOODS, Ill., Oct. 29 /PRNewswire/ -- With the Bush tax cuts about to expire at the close of 2010, the tax rates that will take effect January 1, 2011 will return to the rates that were in effect a decade ago and more money will be withheld from paychecks says CCH, a leading provider of employment and payroll law information and software and part of Wolters Kluwer Law & Business (hr.cch.com).

"Ten years ago, we were facing the same situation: There was talk of upcoming tax cuts. The tax cuts – now known as the 'Bush tax cuts' – were signed on June 7, 2001. The IRS then issued new withholding tables, effective July 1, 2001, that incorporated the new tax cuts. In addition, the new tables took into account the fact that too much money was taken from paychecks that were issued in the first half of the year," said John W. Strzelecki, JD, CCH Senior Payroll Analyst. "Note, however, at the end of 2000, the IRS did not delay releasing new withholding tables for 2001, even though if a tax cut did come, it meant too much money was being withheld from paychecks that were issued prior to the tax cuts. Rather, the IRS issued new tables based on the tax rates that were in effect on January 1, 2001, and also incorporated the 2001 personal exemption amount into the tables."

Fast forward to present day 2010, the Bush tax cuts are nearing expiration at the end of the year. Under federal law, the tax rates that will be in effect January 1, 2011, will be the rates that were in effect on January 1, 2001.

Strzelecki says the IRS will likely issue new withholding tables in November effective January 1, 2011, based on the 2001 tax rates that are scheduled to go into effect at the start of the year. In addition, the IRS will incorporate the 2011 personal exemption amount which is projected to be $3,700, just like they did in the 2001 tables. Then, if the tax cuts are passed and signed, the IRS will revise the withholding tables with an effective date that allows just enough time for the payroll industry to implement the changes, just like in June of 2001. The tables will take into account the fact that too much money was withheld from the paychecks that were issued prior to the tax cuts, also just like in 2001.

"What it all boils down to is workers will see less take home pay beginning in 2011 and more take home pay later in the year, just as we saw in 2001," said Strzelecki.

The following four examples show how more money will be withheld from paychecks beginning in 2011 as compared to current 2010 withholding amounts. The 2011 examples use the withholding tables in effect on January 1, 2001, but take into account the 2011 personal exemption amount, which is projected to be $3,700. These amounts are approximate.

2010 Example 1: Employee Jones, who is single, earns $500 weekly ($26,000 annually). He takes one withholding allowance for himself. The 2010 Percentage Method Withholding Table shows that the amount of the withholding allowance prescribed for a weekly payroll period is $70.19. Subtracting this amount from Jones' weekly pay of $500 leaves $429.81, which is Jones' "amount of wages" for tax computation purposes. Referring now to tax rate Table 1(a) – Weekly Payroll Period, Single Person – it is found that $429.81 falls in the "Over $200 but not over $693" bracket. The amount of tax to be withheld for wages in that bracket is stated to be $8.40 plus 15 percent of the excess over $200. The excess over $200 in Jones' case is $229.81. Thus, $8.40 plus 15 percent of $229.81 is $42.87.

2011 Example 1: Employee Jones, who is single, earns $500 weekly ($26,000 annually). He takes one withholding allowance for himself. The 2011 projected value of the withholding allowance for a weekly payroll period will be $71.15. Subtracting this amount from Jones' weekly pay of $500 leaves $428.85, which is Jones' "amount of wages" for tax computation purposes. Referring now to tax rate 2001 Table 1(a) – Weekly Payroll Period, Single Person – it is found that $428.85 falls in the "Over $51 but not over $552" bracket. The amount of tax to be withheld for wages in that bracket is stated to be 15 percent of the excess over $51. The excess over $51 in Jones' case is $377.85. Thus, 15 percent of $377.85 is $56.68.

Thus, in 2011, $13.81 more will be withheld each weekly paycheck than in 2010.

2010 Example 2: Employee Smith, who is married and has a dependent child, earns $1,700 biweekly ($44,200 annually). Although he is entitled to more than one withholding allowance, he claims only one on his Form W-4. Consequently, his "amount of wages" is $1,700 minus $140.38, or $1,559.62. Referring to tax rate Table 2(b) – Biweekly Payroll Period, Married Person – it is found that $1,559.62 falls within the "Over $942 but not over $2,913" bracket. The tax for that bracket is stated to be $41.30 plus 15 percent of the excess over $942. In this example, the excess over $942 is $617.62. Thus, $41.30 plus 15 percent of $617.62 is $133.94, the amount of tax to be withheld from Smith's biweekly wage.

2011 Example 2: Employee Smith, who is married and has a dependent child, earns $1,700 biweekly ($44,200 annually). Although he is entitled to more than one withholding allowance, he claims only one on his Form W-4. Consequently, his amount of wages is $1,700 minus $142.31, or $1,557.69. Referring to tax rate 2001 Table 2(b) – Biweekly Payroll Period, Married Person – it is found that $1,557.69 falls within the "Over $248 but not over $1,919" bracket. The tax for that bracket is stated to be 15 percent of the excess over $248. In this example, the excess over $248 is $1,309.69. Thus, 15 percent of $1,309.69 is $196.45, the amount of tax to be withheld from Smith's biweekly wage.

Thus, in 2011, $62.51 more will be withheld each biweekly paycheck than in 2010.

2010 Example 3: A married employee with four allowances is paid $4,100 semimonthly. Under the annualizing method, the $4,100 semimonthly wage is multiplied by 24 to arrive at the annual wage of $98,400. Next, the withholding allowances of $14,600 (4 x $3,650) are subtracted from the $98,400 annual wage to arrive at $83,800, the amount of wages subject to tax. The table for an annual payroll period, married employee – Table 7(b) – indicates that the tax to be withheld on $83,800 is $8,762.50 plus 25 percent of the excess over $75,750. Twenty-five percent of $8,050 (the excess over $75,750) is $2,012.50. The $8,762.50 is added to $2,012.50 for a total of $10,775. This amount is prorated over the 24 semimonthly periods to arrive at $448.96, the amount to be withheld from each semimonthly paycheck.

2011 Example 3: A married employee with four allowances is paid $4,100 semimonthly. Under the annualizing method, the $4,100 semimonthly wage is multiplied by 24 to arrive at the annual wage of $98,400. Next, the withholding allowances of $14,800 (4 x $3,700) are subtracted from the $98,400 annual wage to arrive at $83,600, the amount of wages subject to tax. The 2001 table for an annual payroll period, married employee – Table 7(b) – indicates that the tax to be withheld on $83,600 is $6,517.50 plus 28 percent of the excess over $49,900. Twenty-eight percent of $33,700 (the excess over $49,900) is $9,436. The $9,436 is added to $6,517.50 for a total of $15,953.50. This amount is prorated over the 24 semimonthly periods to arrive at $664.73, the amount to be withheld from each semimonthly paycheck.

Thus, in 2011, $215.77 more will be withheld each semimonthly paycheck than in 2010.

2010 Example 4: Employee Thomas, married with two dependent children, earns $3,000 semimonthly and claims four regular allowances and one allowance based on estimated deductions. The value of one semimonthly allowance is $152.08, 5 x $152.08 equals $760.40. After subtracting $760.40 from $3,000, the "amount of wages" is $2,239.60. Referring to Table 3(b) – Semimonthly Payroll Period, Married Person – the entry covering $2,239.60 is "Over $1,021 but not over $3,156." The amount of tax to be withheld is $44.80 plus 15 percent of the excess over $1,021, which is $182.79. Therefore, the total amount to be withheld is $227.59.

2011 Example 4: Employee Thomas, married with two dependent children, earns $3,000 semimonthly and claims four regular allowances and one allowance based on estimated deductions. The value of one semimonthly allowance will be $154.17, 5 x $154.17 equals $770.85. After subtracting $770.85 from $3,000, the "amount of wages" is $2,229.15. Referring to 2001 Table 3(b) – Semimonthly Payroll Period, Married Person – the entry covering $2,229.15 is "Over $2,079 but not over $4,383." The amount of tax to be withheld is $271.50 plus 28 percent of the excess over $2,079, which is $42.04. Therefore, the total amount to be withheld will be $313.54.

Thus, in 2011, $85.95 more will be withheld each semimonthly paycheck than in 2010.

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