Why Did My Paycheck Get Smaller?January 7th, 2013 | Posted by in Saving Money
“Why did my paycheck get smaller? I thought taxes only went up on the rich?!”
All across the country, people will be bombarding their HR/Benefits department with these questions when they see their first paycheck of the New Year. This post will take a look at the expiration of the Social Security Payroll Tax Holiday and why we’re all going to pay slightly more going forward. I’ll also provide a chart on how much less you can expect to see in your check this year.
Social Security Payroll Tax Holiday
I’m sure everyone reading this will remember how bad things were in the economy two years ago. During this time, the government wanted to find a way to help out and get people spending more money again in order to minimize the damage. What better way to do that then to let people take home some extra cash each paycheck! This was great because it wasn’t some sort of tax break we’d only see when we went to file our taxes, it was money we could see right away. There is something called the “Social Security Tax” which really doesn’t go to Social Security directly, but is just a regular old federal tax. Usually this tax is 6.2%, but two years ago the government knocked it down to only 4.2%. That’s why we saw our paychecks get bumped up by a dinner and a few movie tickets each paycheck.
Flash forward to 2013.
Everyone knows that our country has a huge ($16 trillion) debt that we’re supposedly trying to take steps towards paying off. One of the ways we can do this is by getting rid of this temporary tax decrease. The government basically just said “Ok everyone, you had your fun, the economy has improved a lot, we’re going to need your money again, thanks guys!”
JG, was this related to the Fiscal Cliff?
Sorta. The only thing that came out of the Fiscal Cliff Fiasco was an agreement that marginal income taxes would stay the same for everyone except those making more than $400,000 per year ($450,000 if married filing jointly). Congress will fight over what spending cuts will actually happen in a few months; basically kicking the can down the road.
If you haven’t read my post on the Fiscal Cliff, you can read it here. There will still be major cuts to come, so be prepared!
Won’t raising taxes a little actually hurt the economy?
In a word, yes. People are creatures of habit. If every 2 weeks you see the exact same number in your paycheck and all of a sudden that number goes down, you feel it right away. The US economy almost entirely runs on consumer spending. If that’s too fancy of a term, it means that we pretty much only make money as a country by convincing each other to buy random stuff like True Religion jeans, iPads, Lululemon yoga pants, Trukfit hoodies, and mix-and-match shrimp combos from Red Lobster. Either people will buy less of these things or go into debt to get them (don’t do that!).
How much less can I expect to take home?
Glad you asked!
This is just a quick estimate I found, but it will give you an idea of how much less you can expect to take home.
A few thoughts
The US Government is in a real financial bind. Agreeing to cut spending is much harder to do than agreeing to raise taxes. I’m not a rich guy (yet!) and neither are 99.9% of people reading this post, but the government’s idea of what incomes are “well off” might continue to creep down as more people work low-wage and part-time jobs. This means higher taxes for middle-to-upper middle class folks will likely rise. If your income is under the limit, PLEASE PLEASE PLEASE open a Roth IRA. The money you pull out will be tax free and you’ll be sure to thank me later. I’ve outlined four steps to becoming a millionaire here.
What do you all think about your pay check shrinking a bit?
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