New Year, Smaller Paycheck: Payroll Tax Cut Expires

by Miranda Marquit

The recent “fiscal cliff” deal addresses only the tax portion of the issue, putting off the spending portion for a couple of months — at which time the debate will pick up again, with the added “fun” of a debt ceiling debate. For the most part, the Bush era tax cut expiration for those making more than $450,000 (married filing jointly) got most of the play in the package. What many people didn’t see go quietly into the night was the payroll tax cut that you might not even realize you have been enjoying for the last couple of years.

What is the Payroll Tax Cut?

payroll tax cut expires

Your paycheck is about to get smaller.

In 2010, a tax cut for the employee side of payroll taxes was passed. This amounted to a 2% cut in what you were paying in FICA/Social Security taxes. The tax cut was extended a couple of times, and was set to finally expire at the end of 2012. The result of the payroll tax cut was that almost everyone saw a slightly bigger paycheck. Without having to pay that 2% in payroll taxes, it meant more money every pay period.

However, after a while such things start to feel commonplace. Since the payroll tax cut took place at the source of the pay, many just assumed that was the paycheck they were supposed to be getting. The payroll tax cut became considered normal. Now, though, the payroll tax cut has been allowed to expire.

This means that starting now, your paycheck will be a little bit smaller. Your payroll taxes are back up to 6.2%, from the 4.2% that you have been paying. This doesn’t affect employers, since the employer end of the payroll tax didn’t change during the tax cut period. It only affects what employees pay in payroll taxes, and, almost universally, employees will be paying more in payroll taxes, resulting in a smaller paycheck.

Are You Ready for a Smaller Paycheck?

Now you need to be ready for a smaller paycheck. With the payroll tax cut expiring, you will end up paying more toward Social Security, but seeing less in your current paycheck. For someone making $45,000 a year, the expiration of the payroll tax cut means that you will see about $75 less in your pay each month. That could be a week’s worth of groceries, or the amount of your cell phone plan. Keep an eye on your paycheck in the next few weeks, and realize that a smaller check probably means that you are back to paying the full amount of your portion of payroll taxes.

In order to get ready for a smaller paycheck, you might need to make some changes to your current financial habits. Consider cutting back on some of your spending, or finding ways to make more money. You might be surprised at where you can find an extra $75 a month.

If possible, don’t let this change in your paycheck affect what you are setting aside for retirement, though. It might be tempting to adjust your contributions, but you will be better off in the long run if you keep making your higher retirement account contributions, and find the extra money to make up for your lower paycheck elsewhere. Also, be wary of adjusting your income tax withholding. Remember that payroll taxes are completely different from income taxes, and that changing your income tax withholding could be a problem later, resulting in you owing more in income taxes come April.

Carefully consider your situation, and the impact that the payroll tax cut expiration will have on your income. Then make a plan to offset the cost.

Published or updated January 4, 2013.
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{ 1 comment… read it below or add one }

1 Manette @ Barbara Friedberg Personal Finance

Should smaller paycheck mean smaller savings and retirement funds? The answer should be NO. Smaller paycheck should mean less expenses, frugal living, and simpler lifestyle.


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