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Why your next paycheck will be smaller

Middle-class taxpayers avoided an income tax increase in the fiscal cliff budget deal, but the Social Security payroll tax will be higher for everyone.

By Karen Datko Jan 2, 2013 1:13PM

Pay check stub showing taxes withheld © Comstock, Comstock, Getty ImagesNow that the fiscal cliff is in the rearview mirror with a deal that raises income and investment taxes on the wealthiest Americans, there's one tax hike that most U.S. workers will not escape.


On the final day of 2012, the payroll tax for Social Security reverted to its normal rate of 6.2% -- up from the 4.2% it's been since 2011. The tax had been temporarily reduced to give U.S. households extra spending money to help stimulate the economy.


For a household grossing $50,000 a year, the return to the old level will cut take-home pay by $1,000 a year, or $19 a week. For someone making $30,000 in pretax income, the higher tax means $600 less a year.


How much more will you pay? The Wall Street Journal provides a calculator, or you can consult this handy chart. Keep in mind that the payroll tax applies only to the first $113,700 of income.


Extending the payroll tax holiday wasn't even part of the discussion as Congress narrowly avoided the fiscal cliff with a deal that raises income and investment taxes on those making $400,000 a year ($450,000 for couples).


However, by allowing Social Security taxes to return to their previous level, Congress can't say the middle class was spared.


"It's a huge hit," Joel Naroff, president of Naroff Economic Advisors, told The Associated Press. "It hits people whether they're making $10,000 or they're making $2 million. It doesn't matter who you are . . . . The lower your income, the more of your income you're (spending). So if your taxes go up, it's going to come out of your spending."

The Washington Post says this will be the first tax increase nearly half of Americans have seen in their paychecks (other than when your income grows and you move into a higher tax bracket).

The Post added:

"'We haven't seen broad-based individual tax increases at the federal level in the last 30 years,' said Owen Zidar, an economist at the University of California. 'In the 1960s through the 1980s, payroll tax increases affected most taxpayers, but the vast majority of broad-based tax changes have been cuts rather than increases.'"

On the other hand, Social Security has to be funded. That money normally comes from a 12.4% payroll tax, half paid by you and half by your employer. Only employees got the reduced 4.2% rate over the past two years.


The estimated $215 billion workers didn't pay to Social Security for 2011-12 was replaced with money borrowed by the federal government, which added to the national debt.


Will the economy suffer because the tax holiday expired? Maybe. Maybe not. Says the Post:

"Economists say the expiration of the tax cut will be a major drag on the economy this year. Estimates suggest it could cost between 500,000 and 1 million jobs, leaving the unemployment about 0.4 percentage points higher than it otherwise would be."

However, Joseph Rosenberg, a research associate at the Urban/Brookings Tax Policy Center, told American Public Media's Marketplace that if the Bush tax cuts are extended (and they were for the vast majority of folks), "then the impact of the expiration of the payroll tax is not likely to have a significant economic impact."


It is the wealthy who will be seeing the biggest tax increase as a result of the fiscal cliff deal. Says the AP:

"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."

Will you miss the extra $19 or so a week you took home during the payroll tax holiday?

More on MSN Money:


Jan 2, 2013 3:07PM
I did not get a raise for the last 3 years! This last year my employer gave me a whopping 2%. Now my government takes it away. Im sick and tired of the mess our government is making of our counrty. Taxes on top of taxes, etc. It has to stop!!!
Jan 2, 2013 3:07PM
This is not a tax hike, employees have always paid 7.65% for social security, and medicare, until, we had a reprieve for a few years to stimulate the ecomony...employees got a break of about 2%, but were informed that the break would only be for a short period of time....meanwhile, employers still paid the 7.65%, and now we will all return to paying our 7.65% for social security.  Why the media has to make it sound different than the reprieve is now over, I don't understand....I guess it makes better press.
Jan 2, 2013 2:27PM
Obama was a complete imbecile to cut the Social Security tax anyway.  It needs to be increased 2-3% just to pay for future benefits.   But this Ponzi scheme likely will collapse within a decade or two anyway.

Government spending will likely top 4 trillion this year, while we take in a record 2.7 trillion in taxes.  We will STILL have 1.3 trillion dollar deficits as far as the eye can see.

Tack on another 5.2 trillion to the 16.4 trillion we already have and we will have close to 21.6 trillion in debt before Obama leaves office.  Considering he started with 10.2 trillion that  is quite a record.  21.6 trillion divided by 80 million households means your share of this debt is $270,000 up from 127,500 when Obama started.   Did you get your EQUAL SHARE of that  142,5000 that Obama spent for you?  
Jan 2, 2013 2:18PM

On this the DOW should be down 400 points, the dow goes up on rumors and hopes & dreams this too shall pass.

Jan 2, 2013 2:08PM

Not too happy about the bump back to 6.2% because I keep getting my annual letter that says SSI will be broke 3 years before I'm eligible to retire.

Also, is anything else going to go down as a result or is this just another hand in my pocket?

Food, utilities, clothing, all the basic needs are costing more and more.


Jan 2, 2013 1:46PM
Good! It was a stupid thing to do to begin with.
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