SALT LAKE CITY — Even though the U.S. didn't fall off the fiscal cliff, a 2-percent increase on payroll tax deductions went through. It's been an eye-opener as people receive their first paycheck of the new year and realize just how much of their paycheck now is not going into their pocket.
With Congress' fiscal cliff deal signed into law last week, lawmakers and President Obama promised that income taxes for 98 percent of Americans and 97 percent of small businesses would not go up. That's true.
But taxes on everyone's paycheck have risen 2 percent because the Social Security Payroll Tax Holiday has ended.
Greg McBride at Bankrate.com said, "There are a lot of people that the only pay increase they saw in the last two years was that payroll tax holiday. Now, that isn't going away. It's going to squeeze consumer buying power."
With the fiscal cliff deal, Congress failed to renew the payroll tax cuts passed in 2009 that brought Social Security contributions from 6.2 percent down to 4.2 percent. Extending those cuts for 2013 would have cost the government approximately $100 billion. Lawmakers said no, and Pres. Obama praised the final deal.
"We can come together as Democrats and Republicans to cut spending and raise revenue in a way that reduces our deficit, protects our middle class and provides ladders into the middle class for everybody who's willing to work hard," he said.
Under the Federal Insurance Contributions Act, or FICA, your employer must withhold a set percentage of your salary every pay period. Your employer matches that amount and contributes the money to a government account known as the Social Security Trust Fund. If your pay reaches $113,700 this year, you will have contributed the maximum, and you won't pay any more Social Security.
Otherwise, people who make the following salaries will pay extra:
- $20,000 - $30,000 = additional $400 per year
- $30,000 - $40,000 = additional $600 and up
- $50,000 - $75,000 = additional $1000+
Individuals won't face any new taxes until their income reaches $400,000.
"Most working people will see a reduction in their take-home paycheck that will reduce the amount of money they'll have for discretionary expenses. That will also reduce the amount of saving and investing dollars they'll be able to set aside," said Christine Benz, director of Morningstar Personal Finance.
So, what can you do to make sure that less tax, not more, is withheld from 2013 paychecks? You can file a revised Form W-4 with your employer. That form determines how much federal income tax is withheld from your check. The more allowances you claim on the W-4, the less income tax is withheld. More allowances keep more cash coming in from your paycheck every month.
But, there is a downside. You will not receive a big refund check after filing your income taxes in the spring because you will have been getting that money all year.
People unhappy with Congress over the 2 percent tax increase can remember that the "payroll tax holiday" on Social Security was always meant to be temporary.