Social Security Payroll Tax Reduction Expires Under Fiscal Cliff Deal

Social Security is financed by a 12.4 percent tax on wages up to $113,700, with employers paying half and workers paying the other half. Obama and Congress reduced the share paid by workers from 6.2 percent to 4.2 percent for 2011 and 2012, saving a typical family about $1,000 a year. Obama pushed hard to enact the payroll tax cut for 2011 and to extend it through 2012. But it was never fully embraced by either party, and this time around, there was general agreement to let it expire.

Locals react to expiration of payroll tax cut

January 1, 2013

Fox8 - NOLA residents will have a bit less money to spend at their local store, thanks to the expiration of the 2010 payroll tax deduction.

Local wage earners are bracing for a smaller paycheck. That's because a reduction in Social Security payroll taxes expired with the New Year, and there are no signs the Congress wants to reverse that.

The U.S. Senate passed the "anti-fiscal cliff bill" during the wee hours of Monday morning to avert massive across-the-board tax hikes and spending cuts. Regardless of whether the House of Representatives follows suit, most everyone will face higher payroll taxes this year -- not just the wealthy.

"It's not too good," said local taxpayer Randy Lanclos. 

Under the bill approved with bipartisan support in the Senate, a 2% cut in payroll taxes enacted on a temporary basis in 2010 to spur consumer spending and improve the economy is allowed to expire, raising that rate from 4.2 percent to 6.2 percent.

For someone making $50,000 a year, that amounts to an additional $1,000 coming out of their paycheck this year.

"Every little bit hurts, you know, it all adds up," continued Lanclos.

But others are ready to stomach the pain in their wallets.

"We have to do it together, and if that means a partial pay cut and knocking down some of our own personal enjoyment for the betterment of our country, we live in the best country in the world and we just have to do it," said local taxpayer Charles Chevalier.

In New Orleans East, real estate broker Debra Pounds said the payroll tax hike will definitely impact her industry.

"My client base is primarily middle class, or those people who are striving to enter into the middle class, and so often... they just barely get over the numbers that they need in order to be able to qualify for that mortgage," said Pounds.

Pounds also is concerned that the higher payroll taxes could make it more difficult for some people to pay mortgages they currently have.

"We don't want to have the foreclosure rate, which has been going down, to begin to go up again," stated Pounds.

Others in the city said President Barack Obama and the Congress should have found a way to keep the payroll tax at the reduced rate.

"That would have been nice," said Lanclos.

And so the start of the 2013 leaves many locals anxious on several fronts because of the expiration of the payroll tax decrease.

"Any impact negatively to their disposable income is going to determine whether or not they can buy at all, or it's going to affect how much they can afford," said Pounds.

She added that the real estate industry is nervous that the ongoing national deficit will lead some in Washington to target mortgage interest deductions, which she said would further hurt homebuyers and sellers.

Despite deal, taxes to rise for most Americans

January 2, 2013

AP - While the tax package that Congress passed New Year's Day will protect 99 percent of Americans from an income tax increase, most of them will still end up paying more federal taxes in 2013.

That's because the legislation did nothing to prevent a temporary reduction in the Social Security payroll tax from expiring. In 2012, that 2-percentage-point cut in the payroll tax was worth about $1,000 to a worker making $50,000 a year.

The Tax Policy Center, a nonpartisan Washington research group, estimates that 77 percent of American households will face higher federal taxes in 2013 under the agreement negotiated between President Barack Obama and Senate Republicans. High-income families will feel the biggest tax increases, but many middle- and low-income families will pay higher taxes too.

Households making between $40,000 and $50,000 will face an average tax increase of $579 in 2013, according to the Tax Policy Center's analysis. Households making between $50,000 and $75,000 will face an average tax increase of $822.

"For most people, it's just the payroll tax," said Roberton Williams, a senior fellow at the Tax Policy Center.

The tax increases could be a lot higher. A huge package of tax cuts first enacted under President George W. Bush was scheduled to expire Tuesday as part of the "fiscal cliff." The Bush-era tax cuts lowered taxes for families at every income level, reduced investment taxes and the estate tax, and enhanced a number of tax credits, including a $1,000-per-child credit.

The package passed Tuesday by the Senate and House extends most the Bush-era tax cuts for individuals making less than $400,000 and married couples making less than $450,000.

Obama said the deal "protects 98 percent of Americans and 97 percent of small business owners from a middle-class tax hike. While neither Democrats nor Republicans got everything they wanted, this agreement is the right thing to do for our country."

The income threshold covers more than 99 percent of all households, exceeding Obama's claim, according to the Tax Policy Center. However, the increase in payroll taxes will hit nearly every wage earner.

Social Security is financed by a 12.4 percent tax on wages up to $113,700, with employers paying half and workers paying the other half. Obama and Congress reduced the share paid by workers from 6.2 percent to 4.2 percent for 2011 and 2012, saving a typical family about $1,000 a year.

Obama pushed hard to enact the payroll tax cut for 2011 and to extend it through 2012. But it was never fully embraced by either party, and this time around, there was general agreement to let it expire.

The new tax package would increase the income tax rate from 35 percent to 39.6 percent on income above $400,000 for individuals and $450,000 for married couples. Investment taxes would increase for people who fall in the new top tax bracket.

High-income families will also pay higher taxes this year as part of Obama's 2010 health care law. As part of that law, a new 3.8 percent tax is being imposed on investment income for individuals making more than $200,000 a year and couples making more than $250,000.

Together, the new tax package and Obama's health care law will produce significant tax increases for many high-income families.

For 2013, households making between $500,000 and $1 million would get an average tax increase of $14,812, according to the Tax Policy Center analysis. Households making more than $1 million would get an average tax increase of $170,341.

"If you're rich, you're almost certain to get a big tax increase," Williams said.

What happens if the payroll tax cut expires

December 19, 2012

CNNMoney - As Republicans and Democrats search for a plan to avert a fiscal cliff, it's looking more likely that the payroll tax holiday introduced under President Obama in 2010 won't be extended. Should this benefit expire, 125 million households would see their paychecks shrink, the Tax Policy Center estimates.

That's a far bigger slice of the population than the group of Americans who would be affected by proposed income tax hikes. If taxes are raised on incomes exceeding $250,000, roughly 2.8 million households would be impacted. Meanwhile, a mere 368,000 Americans would feel a tax hit if rates rise on incomes above $1 million.

Letting the payroll tax break expire shouldn't come as a big surprise: Obama introduced the payroll tax cut as a temporary measure to stimulate the economy. But nothing is set in stone, and a revival of the tax break -- or some form of it -- isn't out of the question.

If it does expire, the payroll tax rate would revert from 4.2% to 6.2% on the first $113,700 in earnings.

"It would pull money out of peoples' wallets, and for a lot of folks, that really matters," said Roberton Williams, a senior fellow at the Tax Policy Center. 

Someone making $100,000 would receive about $167 less in their monthly paycheck -- or $2,000 per year. A $50,000 income earner would see their paycheck drop by $83 a month -- or nearly $1,000 a year if the payroll tax cut expires. And it continues to get smaller, with someone earning $30,000 losing $50 from their monthly paycheck.

While losing $50 a month may seem negligible to some people, it still adds up to $600 a year -- a sum many low-income families can hardly afford to lose.

"The people who are going to feel it the most are people making minimum wage to about $15 an hour, because they're the ones who are just getting by," said John Lieberman, a CPA at Perelson Weiner LLP. "Two percent of someone's income is a lot of money when you're only making $400 a week."

Expecting a raise? If the payroll tax cut isn't extended, a big chunk of your salary hike will likely get wiped out.

Since the average raise for 2013 is expected to be 2.9%, roughly two thirds of that increase would be eaten up by the 2% reduction in paychecks due to the expiration of the payroll tax. That means the worker earning $50,000 would be left only $450 better off after receiving a $1,450 raise. Meanwhile, a raise of $2,900 for the $100,000 earner would result in a net benefit of $900.

Businesses are also worried about what this reduction in pay will mean for consumer spending -- and their bottom lines.

"People will spend less, and it will affect the economy," said Lieberman.