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Tax Credits and Employee Payroll Tax Cuts for 2010

In Dec. 2010, President Barack Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. The Act includes a two-year extension of the Bush-era income taxes, two percentage point cut in employee-paid payroll taxes and self-employment tax for 2011, as well as retroactively enhanced and extended tax breaks for individuals and businesses.

The main provisions of the bill, most of which are temporary include:

Temporary Employee Payroll Tax Cut

Under present law, the FICA tax consists of two parts: (1) the old age, survivors and disability insurance (OASDI) of 6.2 percent of covered payroll up to the wage base $106,800 in 2010, and (2) the Medicare Hospital Insurance (HI) tax equal to 1.45 percent of all wages. Employers and employees are subject to FICA on the same amount, which is 7.65 percent in 2010.

The Act temporarily reduces the OASDI tax component to 4.2 percent for employees on payroll and to 10.4 percent for self-employed individuals in 2011.

Tax Credits for Educational Incentives

Under the Act, some educational benefits will extended through 2012. If certain requirements are met, up to $5,250 annually of educational assistance provided by an employer to an employee is excludable for both income and employment tax purposes.

Temporary Extension of Expiring Provisions

The following provisions are generally extended for two years:

  1. Business Tax Relief
    • Research tax credit
    • Indian employment tax credit
    • New markets tax credit
    • Employer payroll credit for active duty members of uniformed services
    • 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements
    • Enhanced charitable deduction for contribution of food inventory
    • Enhanced charitable contribution for corporate contributions of computer inventory for educational purposesBasis adjustment to stock of S corporations making charitable contributions of property.
    • Empowerment zone tax credits
  2. Provisions Relating to Energy
  3. Individual Tax Relief
  4. Temporary Disaster Relieve Provisions

Other Incentives and Tax Credits

  1. The Act extends the pre-2012 benefits for one year, through the end of 2012 for the Adoption Credit and Exclusion from Income for Employer Provided
  2. The Act extends the pre-2012 benefits for one year, through the end of 2012 for the Employer-Provided Child Care Credit. Employers receive a tax credit of up to 25 percent of qualified expenses for employee child care, up to $150,000 per taxable year.
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