Successful small business owners know that nothing is guaranteed in business.
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One of the few safe bets is that every year or two, Congress will enact changes to the tax code, particularly in the area of payroll taxes. If you thought you had your payroll taxes nailed down for 2011, think again because big changes may be just around the corner.
Heading into the last quarter of 2010, payroll taxes for 2011 are still in flux. Muddying the waters is the issue of the "Bush tax cuts". Enacted by President Bush in 2001 and 2003, the Bush tax cuts are set to expire on December 31st. However, Congress may choose to extend all or part of these tax cuts in 2011. Then again, they may let them expire completely. Either way, their decision will have significant ramifications on payroll taxes in the coming year.
Although nothing is for sure, here's what you need to know about the Bush tax cuts and other payroll tax changes for 2011.
Bush Tax Cuts
If the Bush tax cuts aren't extended for 2011, taxpayers will see an instant increase of the lowest tax bracket, from 10% to 15%. The so-called "marriage penalty" will also be reinstated, meaning that married couples will pay more taxes than they would if they were two, single taxpayers. Combined with a decrease in the child tax credit from $1,000 per child to $500, the impact on taxpayers could be significant and employers will need to offer their workers the opportunity to adjust their withholdings to compensate.
Earned Income Credit
Apart from the Bush tax cuts, the Earned Income Credit will continue in its current form with one exception. Taxpayers who qualify for the EIC can no longer receive it as a portion of their paycheck. Instead, they will receive it as part of their normal, year-end tax refund.
Initially, plans for 2011 included a requirement for employers to state the value of each employee's health coverage on their year-end W-2 statement. Congress has changed its mind on this once again, and now employers have the option of including health coverage values on W-2s . . . It's completely up to you how you want to handle this one.
Many employees take advantage of Flexible Spending Accounts (FSAs) to avoid paying tax on out-of-pockets costs for healthcare. Starting in 2011, employees will only be able to receive FSA reimbursement for medications that have been prescribed by a doctor. This is a big deal for some workers, so you'll want to encourage workers to adjust their FSA withholdings accordingly.