Jan. 20, 2011

Payroll tax reduction means more money in paychecks

by Paula Van Brocklin

Iowa State employees will notice more money in their monthly paychecks beginning Jan. 31, thanks to a reduction in federal payroll taxes by 2 percentage points.

In 2010, 6.2 percent of each employee's gross paycheck went to FICA, a tax for the Federal Insurance Contributions Act. FICA is an employment tax imposed by the federal government on both employees and employers to fund Social Security and Medicare.

For 2011 and possibly longer, the employee portion of FICA has been reduced to 4.2 percent. All ISU employees will receive an increase in their paychecks because of the reduction. How much of an increase you'll see depends on your income. Here's what you can expect based on gross annual earnings:

  • $30,000 -- $50 per month ($600 annually)
  • $50,000 -- $83 per month ($1,000 annually)
  • $70,000 -- $116 per month ($1,400 annually)
  • $90,000 -- $150 per month ($1,800 annually)

FICA regulations state that only $106,800 of an individual's income can be taxed, which means individuals who earn more than that only will be taxed for $106,800. The FICA cap does not affect the Medicare portion of the tax; a Medicare tax of 1.45 percent is taxed on all earnings with no limit.

Options for your extra money

Before you start daydreaming of spending your extra dollars on the latest electronic gadgets or saving for a Hawaiian vacation, ISU retirement specialist Ann Doty offers this option -- invest it.

"These are not huge dollar amounts and won't make a significant improvement in one's lifestyle if the money is spent," she said. "However, if this money was saved for five, 10 or 20 years and grown either tax-deferred or after tax, this may be able to pay for a year of medical insurance premiums, allowing someone to retire a little earlier."

How to invest the money

Employees who choose to invest extra income from their paychecks must open a group supplemental retirement annuity with TIAA-CREF, VALIC, Ameriprise or MetLife. Contact information for these providers is available on human resource services' benefits website.

To get started, print and complete an elective payroll reduction form (PDF), which gives ISU's payroll department the authority to take extra money out of your paycheck for retirement. Employees who already have a supplemental retirement annuity and want to change the percentage or dollar amount they currently contribute also must complete this form. Requests for new accounts and changes to existing accounts made by the 15th of the month will go into effect for the end-of-the-month paycheck.

If you need additional help or have questions, contact Doty at 4-4800.