There's still time. Congress could decide at a later date to reinstate the payroll tax cut. It could take effect retroactively, which mean the government will take less from each paycheck going forward to reach the desired rate by the end of the year. Or the government could reduce the rate in the middle of 2013 without any concern for what has already been paid by employees. Either way, an extension of the payroll tax cut seems unlikely to me because it hasn't been discussed in fiscal cliff negotiations thus far.Employees should start planning today for the reduction in take-home pay. In this article, I'll assume that net income will be reduced by $100 per month. That's going to be a high estimate for most people affected by the return to the higher payroll tax rate, but it is a nice round number. If you plan for the worst, you'll be pleasantly surprised when you end up with a more favorable cash flow. Reduce your spending by $100 per month If you already have a well-defined monthly spending budget, find an area where you can shave $100. Resist the urge to save less. Don't sacrifice your savings and don't reduce your contributions to retirement due to the payroll tax cut. Find the difference in spending rather than saving.
- It may be time to drop Showtime or HBO, particularly if you signed up during a promotional period and are now paying full price to your cable company. Dropping some services might trigger a new deal that could save you money.
- Re-evaluate your mobile phone plan, particularly if you've expanded your service to include data for tablets over the past few years.
- How much money are you spending on clothing, particularly if you have children? If you've felt the economy improve over the last few years - and not everyone has - you may be spending more than you did in 2008 for expenses like these.
- Note that gas prices have been declining. If you drive often, such as having a daily commute to work, you've probably seen your expenses drop already.
Because of the additional tax burden on the self-employed, aim to increase your income by $250.
- How would you feel about earning money from one of your hobbies? If you enjoy photography and have proven yourself to be more skilled than the thousands of kids who use their mobile phones as cameras, use automated effects filters, and share their “art” on Facebook, consider doing a family portrait session each month.
- In the frenetic race to create ever-increasing content online, writers are in demand. Consider offering your skills as a freelance writer for one of a vast number of websites willing to hire good copywriters.
- If you are not legally restricted, take what you do for a living and offer it to others for a fee. If you're an in-house accountant, offer to handle your friends' tax returns. That's seasonal work, but it could provide enough self-employment income to cover the payroll tax increase for the entire year. If you do office work, find an opportunity to freelance data entry.
It's up to the individual to prepare for the changes. When that means less coming home in the form of pay, the changes have to come from spending or income in order to leave saving unaffected. How will you prepare for the elimination of the payroll tax cut?