Overview of Payroll Tax Receipts

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2% FICA Cut Partially Obscured by Bonus Season
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A reduction of 2 percentage points in employee Social Security contributions came into effect on Jan 1st, 2011. The effect of this change cannot be clearly discerned in the tax receipts as yet, because:

• Much of January’s receipts are for payrolls made in December.
• Although we saw December year-end bonuses increase over the year before, the same cannot yet be said for the deferred bonuses which employers pay in the pariod Jan. 1 - Mar. 15th. 

Thus we have two (or more - see below) competing changes.  However, some of the sharp drop we have seen recently must be due to the FICA cut.  In a month’s time, with bonuses out of the way, we will begin to see the pattern of regular payrolls take shape.  What level of deposits might we expect?  It is hard to predict accurately, but here are the factors:

• Let us take as an estimate that social security taxes account for about half of all payroll tax receipts.  This includes employee and employer contributions each of 6.2% (excluding Medicare).  So, a reduction in employee contributions to a 4.2% rate would give rise, roughty, to an 8% reduction in payroll tax receipts, year on year.
• The Making Work Pay credit has ceased as of Jan. 1st, This will act to increase the amount of tax withheld, though not by as much as the FICA-induced drop.
• There have been increases in the income tax bands of around 1.5%.  This will tend to reduce the amount of tax withheld.
• According to the Bureau of Labor Statisics, as of January 2011, total weekly earnings in private employment grew by 2.5% year over year, including a contribution of 1.2% growth in the number of jobs. This would tend to increase the amount of tax withheld.

Adding and substracting all of these estimates together yields an estimate of tax receipts with a fairly low accuracy, but we could see payroll taxes coming in a few percentage points below 2010’s, although jobs and earnings growth in the coming month or so, remain to be seen.

In the second chart below, the -6% point in February cannot be considered too significant given the bonus season and the possible effect of payroll systems catching up with the FICA tax change.  The latest year over year change is back at the -2% level.  We should get an indication of the new levels in April.