No Payroll Tax Credit Extension into 2013. See How Much Your Paycheck Will Drop With Higher Taxes

13 comments

[Updated following latest fiscal cliff negotiations] The 2 percent cut in Americans’ payroll taxes, effective in 2011 and 2012, expired on December 31st 2012.  This stimulus driven tax credit did not receive much support for an extension from either party or the President, and was a casualty of the fiscal cliff deal that did extend federal income tax cuts.

The payroll tax credit dropped an employees payroll withholding rate for social security taxes to 4.2 percent from 6.2 percent. This resulted in a potential after tax saving of up to $2000, and affected about 160 million Americans who had an earned income source. The expiry of this tax break means the payroll withholding tax rate is going back up to 6.2 percent. The table below shows a broad sampling of how an employees take home pay will be affected based on their annual pre-tax income. For example, someone earning $50,000 will see their monthly after tax pay drop by $83.33 in 2013.

2013 Payroll Tax Credit Expiry Impacts

If there are any changes to the status of this credit or other economic items related to payroll taxes I will provide an update and encourage you to subscribe via RSSEmailFacebook or Twitter to get the latest articles.

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{ 6 comments… read them below or add one }

Jenny January 14, 2013 at 11:18 am

I make $120,000 a year and I was expecting a 2% cut to my paycheck this year but when I just checked it, it was more like a 6% drop why???

Reply

Andy January 14, 2013 at 11:22 am

Jenny – There are 2 reasons why your pay cut in 2013 was larger than expected. The first, and most likely one, is that you are probably comparing your last paycheck in 2012 to your newest one in 2013. Because you make more than the 2012 SSI wage base limit (~ 112,000) your income above that (8K) is NOT subject to SSI payroll taxes. So your last few paychecks were higher than earlier in the year. My suggestion is to compare a 2012 pay check from mid-year to your Jan 2013 one and you should see a 2% drop. Contact your payroll department if this is not the case.

The second possibility is that your company has not updated their systems with the fiscal cliff legislation changes so they have got the Clinton-era tax rates (because the bush-era ones expired on Dec 31st) in place. This should be fixed and you will get a credit. Again call your payroll/HR department to confirm.

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Mary January 1, 2013 at 5:07 pm

So my paycheck will be less in 2013. Great! Just what i need with the credit card bills rolling in

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Andy (Author) October 20, 2012 at 4:32 pm

I was reading the NY times on a related topic and some good quotes (taking both sides of the argument for and against the credit) that sum up the impact of this credit are:

“Instead of returning the social security payroll tax on wage earners to 6.2%, why not raise it from the current 4.2% to say 4.5%, and eliminate the tax exemption on wages above $110,100, so those higher earnings would also be taxed at 4.5%, instead of zero? A bit of “shared sacrifice.” Old age pensions, like public education, unemployment insurance, and health care, benefit American society as a whole, not just the recipients, and the tax structure should reflect that. Of course, taxing earnings above $110,100 would increase the social security taxes of every member of Congress, buy hey, what about economic patriotism? Hello? Hello? Congress?”

“This was a misguided tax cut 2 years ago and it is about time it ends. Two years ago everyone knew that the Social Security and Medicare programs were heading toward insolvency in a matter of years, yet our leaders decided to cut the flow of capital into those programs through this tax cut. And what did the tax cut do for the economy? Not much it would seem, looking at the current unemployment rate and the real threat of another recession on the horizon.

Many are calling for eliminating the cap on income subject to social security taxes, arguing that is only “fair”, Really? If you want to un-cap the payouts then i am OK with un-capping the taxes. Social Security, while operating like a ponzi scheme, is not unlike a 401k or IRA. The more one saves and puts away for retirement, the greater the benefits while in retirement. However some here are arguing that is not fair. A middle class teacher, fireman, police officer or other union worker could be making $110k, paying in the maximum into social security and being eligible for maximum benefits, in addition to a pension (funded by taxpayers if a municipal employee). Meanwhile the woman making $250k only has a 401k or IRA to which she must contribute to herself. No pension. It seems that “fair” is in the eye of the beholder.”

“It’s foolish to think that the payroll tax is any different from any other income tax: it all goes into the same pot. The politicians pretended it was some kind of a savings plan so they wouldn’t be called socialists. I’m a self-employed carpenter so I pay 15.3 percent on 100 percent of my income. Before I pay any other income tax, I’m paying more than Romney has paid in years, if ever. Because the FICA tax stops after $110,000 it is terrifically regressive. I would like to see payroll tax applied to all income- “earned” or otherwise.”

“Payroll taxes hit all wage earners, a group which includes some of the most cash-constrained earners (people who live pay-check to paycheck and have no choice but to spend what they earn). Odds are it did some good in the short-term.

If the money is repaid in the future at a time when the economy is stronger, it may marginally reduce growth, but it will happen in a context where it does less harm (contra doing nothing to stimulate demand during a severe recession).

The worst stimulus proposal enacted was probably the extension of the top level Bush tax cuts, which in many cases was pure dead-weight loss on the budget with almost no stimulative effect. If Romney’s tax evasion holiday (i.e. tax repatriation plan for funds held off-shore) goes through, that would be the worst off all stimulus programs hands down.”

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Bud October 20, 2012 at 11:53 am

JPMorgan Chase recently published a study estimating a cut to GDP of 0.6% next year from canceling the payroll tax cut, which will suck $125 billion out of the economy. Just what we need! Extend the tax cut congress!

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Steve McManus October 20, 2012 at 6:50 am

Please notify me of any updates on extension of 2011 tax credit extension

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