Now that our politicians have finally come to a decision about the new 2011 tax law, your employees have a decision of their own to make – what will they do with the 2 percent raise they will see in their paychecks?
With the December 17, 2010 passage of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, employees will only pay 4.2 percent towards Social Security tax in 2011, instead of the traditional 6.2 percent.
For an employee making $50,000 this means they will receive an additional $1,000 in their net take home pay for 2011. A 40 year-old employee who contributes an extra $1,000 towards their 401(k) just in the year 2011 would have an additional $8,000 at age 67, based on an aggressive investment strategy.
However, if the employee decides to increase their salary deferral by that extra 2 percent in 2011, the odds are that they will continue to contribute that 2 percent (even if we go back to the traditional 6.4 percent Social Security tax in 2012) and will have over $95,000 in additional funds saved for retirement without even considering any future raises, just based on their current $50,000 salary. It gets even better for a higher income earner, since the Social Security tax applies to wages up to $106,000 in 2011.
Before your employees get used to that extra spending money, spread the word about saving more. Have a financial education workshop that covers all the new tax law changes that impact your employee base, or send out a flyer encouraging them to make the 2 percent decision towards their 401(k).
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Then ask yourself, what plans have you made for your 2 percent decision?
This was originally published on the Financial Finesse blog for Workplace Financial Planning and Education.