Plan For The Payroll Tax Cut Expiring In 2013

Missing from discussions about the so-called fiscal cliff is the option to continue the payroll tax cut. To boost the economy, President Obama and Congress introduced a stimulus bill in 2010 that reduced the payroll tax, money collected at the time of each paycheck from employers and employees (workers with W2 forms).

The employee's share of the tax has normally been 6.2 percent with a built-in ceiling. The ceiling ensures that those earning $110,100 or less pay the full amount of the tax, but those earning more pay no more tax than those earning the maximum, lowering their effective payroll tax rate. Earn $1 million as a W2 employee, and you pay only 0.07% towards the payroll tax.

The payroll tax funds Social Security. Watching the government can be interesting. As we observed while the country was beginning to dip into the recession, political rhetoric moves quickly from finding ways of boosting Social Security to adopting a tax cut which could accelerate the supposed demise of this government program. Once the idea of a stimulus today became more important than preparing for tomorrow's realities, the conversation focused on reducing the payroll tax.

The stimulus bill reduced the employee's portion of the payroll tax two percentage points, from 6.2 percent to 4.2 percent, and that change has been extended several times. The payroll tax cut is set to expire tomorrow, January 1, 2013, and neither the President nor the Congress has discussed extended this particular tax cut. Your first paycheck in 2013 will reflect the higher payroll tax rate, reducing your net take-home pay.

Regardless of whether income tax rates remain low or are returned to their levels before President Bush oversaw his round of income tax cuts, net pay will be lower in 2013 than it was in 2012. In general, with all other things being equal (which they never are), someone earning $50,000 will see $83 less each month.