Are Income Limits Attached to the Payroll Tax Cut?

The payroll tax cut -- which lowered the amount workers pay toward Social Security taxes to 4.2% from 6.2% -- kicked in this month, and a reader wants to know if there are any income-eligibility limits on the tax break. Let's find out ...

Q: Are there income eligibility limits to the 2011 payroll tax cut stimulus plan?

A: While the Obama administration would prefer that you don't call the 2011 payroll tax cut "stimulus," the main objective is obviously to put more cash in consumers hands in the hopes that they'll spend it -- and stimulate the economy.

Under the tax cut, the tax on gross wages is reduced to 4.2% from 6.2% for 2011. (Employers must still pay their full 6.2% share.) Since Social Security (or FICA) tax only applies to the first $106,800 in wages for 2011, the highest earners could see an additional $2,100 in their paychecks. And, to answer your question, there are no income limits attached to this tax break.

Individuals earning less than $106,800, should have already seen their paychecks increase. Those earnings more than $106,800 will see a bigger bump now, and then again later in the year once you've paid your limit of Social Security taxes and the remaining 4.2% payroll tax goes away as well.

This calculator can give you a rough idea of what your paycheck should look like after the payroll tax cut. Remember though, that other deductions from your paycheck, such as retirement savings or life insurance premiums, aren't included in the total. If you haven't seen an increase, don't panic -- employers have until Jan. 31 to update their accounting systems to conform with the new withholding, according to the Internal Revenue Service.

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