Before it adjourned in December, the previous Congress passed a sweeping income tax reform bill designed to extend the Bush tax cuts for a couple more years. One important feature of that law, which goes into effect in January 2011, is a “payroll tax holiday.” Workers who earn wages and salaries must pay 6.2% for Social Security payroll taxes until they reach  earned income of $106,800 per year. All earned income above $106,800 is exempt from Social Security payroll tax.

Additionally, workers pay 1.45% of their earned income for Medicare payroll taxes. There is no cap on the earned income subject to Medicare tax.

Self-employed persons pay 12.4% Social Security tax up to $106,800 plus 2.9% Medicare tax.

Under the recently-enacted tax law, the Social Security payroll tax has been reduced by 2% for the year 2011. That means that someone earning $106,800 will save nearly $200 per month in Social Security payroll taxes. Self-employed persons will also save 2% (not 4%) on their Social Security taxes in 2011.

What does this mean for child support? Under Pennsylvania law, a change in the law which has a material effect on child support is considered a “change in circumstances” warranting modification. It is conceivable that this change in the law may affect many child support cases throughout the Commonwealth. Since the law may affect payors and/or recipients, it is difficult to predict what effect it will have across the board, but it will certainly make a difference in some cases. My advice: contact your divorce lawyer, run the numbers, and negotiate a temporary modification in child support.

But do it soon: the Social Security payroll tax goes back to normal in 2012.