Taxes 
7
comments

How Much Will the Payroll Tax Cut Cost You?

Email  Print Print  

My first pay chequeA couple of years ago, in an effort to stimulate the economy, Congress passed a payroll tax cut. Even though the tax cut was set to expire at the end of last year, an extension means that the payroll tax cut is good through the end of 2012.

As the end of the year approaches, it is clear that the situation is about to come to a head. Hardly anyone is talking about the upcoming expiration of the payroll tax cut, which reduced the employee side of the FICA/Social Security tax to 4.2% from 6.2%. For many people, that didn’t make a huge difference in a paycheck. For example, someone making $50,000 a year has been saving about $1,000 a year. On average, that amounts to slightly more than $19 per week.

Many workers probably don’t even realize that they are enjoying a tax break right now, and that means that it will come as something of a shock come 2013 when the paycheck is a little bit lower.

Calculating What You Will Owe

You will want to be prepared for the changes in your paycheck. To determine what you will owe, you need to first figure out your gross pay. How much are you paid each year? Multiply that amount by 0.0420. That is how much you are paying right now. Then, multiply that amount by 0.0620. That is what you will pay starting in 2013.

If your gross pay is $45,000 a year, your portion of the FICA/Social Security tax is $1,890 a year. But, starting in 2013, if the payroll tax cut is allowed to expire, your portion will be $2,790. That’s an increase of $900 a year, or $75 a month. (These calculations don’t take into account other taxes, or tax breaks you might have. It’s meant as a simple illustration.)

Realize, though, that FICA/Social Security is only taken on the first $110,100 in 2012, but it will rise to the first $113,700 in 2013. So, if you make $115,000 a year, things are a little different. Not only are you dealing with an increase in what you pay, but you are also dealing with an increase in the amount of money that the money will be subject to FICA/Social Security. In this example, you are paying $4,624.20 for the year, and next year that amount will jump to $7,049.40 for the year, or an extra $202.10 per month.

Suddenly, that amount seems a little more daunting. After all, $75 might be a week’s worth of groceries for a family of three, or it might be a nice night out on the town. For the higher earner, that $202.10 per month might also have a high impact on the monthly budget. Whatever that money means to you, you need to be ready to make  adjustments in order to deal with the new reality.

Basically, your options boil down to two possibilities:

  1. Cut your spending: Look through your budget and identify costs that have crept up on you over the last couple of years. Reduce your spending so that you are back in line with your pre-tax-cut budget. Find the wants in your budget, and reduce your spending on them.
  2. Make more money: Consider finding a way to make a little more money. You can pick up an extra shift or two each month at work, or start a side hustle in order to cover the shortfall (but don’t forget that you will have to pay taxes on the extra that you make, but what you make will still offset that).
Are you ready for the expiration of the payroll tax cut?

(Photo: dmmd303)

{ 7 comments, please add your thoughts now! }

Related Posts


RSS Subscribe Like this article? Get all the latest articles sent to your email for free every day. Enter your email address and click "Subscribe." Your email will only be used for this daily subscription and you can unsubscribe anytime.

7 Responses to “How Much Will the Payroll Tax Cut Cost You?”

  1. Lei Lani says:

    This 2% reduction is in the employee’s withholding contribution to FICA (Federal Insurance Contributions Act) for payment into Social Security. I never understood how this reduction got passed in the first place. Hasn’t there been a lot of talk about how Social Security is underfunded to begin with? I agree with letting it either A) expire and go back to 6.2% withheld from employees or B) added to the employer’s portion. I would much rather have 2% taken out of my pay than risk companies having to pay more.
    (I am the CFO of an small engineering firm, so I see it from both sides, employee and employer)

  2. Rick says:

    I’m neither the thriftiest nor the most dogmatic person around, but if $200 will “have a high impact on the monthly budget” of someone making nearly $10,000/mo, something’s wrong.

  3. rick says:

    We should pay that small percent into the system to ensure that social security stays solvent. If people are talking about it running out in several years, why would we cut our contributions to it? Hello!

    • Jeff Joseph says:

      Politicians trying to buy your vote.
      What they didn’t say is that it doesn’t help your Retirement benefit when you retire.

  4. flip says:

    Im kinda glad im poor right now so I dont have to experience the horror of that.

  5. Frotroz says:

    I have little experience but I dont like that much amount of burden and it looks burden then liability to me.

  6. Steph says:

    First of all, then need to just cut our losses on social security and let it run out, or make plans to have it run out in a reasonable amount of time.

    As for then new increase in taxes, that $70 a month is going to make a HUGE impact on my budget. I’m lucky if I have that much left at the end of the month. Granted, I’m trying to aggressively pay down my student loans, but once the rest of them come out of grace in a few months, I’ll barely be able to afford the minimum payments. I don’t want to defer my loans, but it looks like that will be my only option at this point.


Please Leave a Reply
Bargaineering Comment Policy


Previous Article: «
Next Article: »
Advertising Disclosure: Bargaineering may be compensated in exchange for featured placement of certain sponsored products and services, or your clicking on links posted on this website.
About | Contact Me | Privacy Policy/Your California Privacy Rights | Terms of Use | Press
Copyright © 2014 by www.Bargaineering.com. All rights reserved.