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# How Much Will the Payroll Tax Cut Cost You?

A 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 [3].

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 [4]. 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 [5] in your budget, and reduce your spending on them.
2. Make more money: Consider finding a way to make a little more money [6]. 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])