Smart SpendingSmart Spending

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 4:04PM

unemployment should be cut to 13 weeks....nothing more

Jan 2, 2013 4:00PM
What everyone seems to forget is that there was a $400.00 work credit that was done away with when the social security tax was reduced by 2%, so in reality someone making 20000.00 didnt make anymore in 2011 then they did it 2010 for instance, the 2% decrease in social security tax benefitted those making more money.  A person making 50000.00 had an increase of $600 over what they got in 2010.  Also it made no sense at all to take away the 400.00 credit when the social security fund needs to be built up and left for the purpose it was intended.  And furthermore all members of Congress and the Senate should not be giving any kind of raises since they have been doing so a poor job of running our government.  They need to be spending as much time there as any American spends at their job. Also doesnt make much sense that with the economy is as bad as it has been, that our cost of food etc has gone up.  Again it has been the wealthy getting richer while the rest of us are getting poorer.  I have no qualms at all about the richer finally paying more taxes and hopefully their fair share.
Jan 2, 2013 3:57PM
The deficit, as far as I know, started with Reagan........and everyone looked the other way until now..........who's at fault.....mmmm large corrupt corps who suck all the government money, corrupt our politicians and try to keep everyone at poverty level while they demand the government to pay for all their problems that they have caused.  What's really funny is stocks are a joke, the real money is in the wages these people allow to can any elected business board member or politician be allowed to continue in such a manor....oh yeah, we're not too stupid to figure it out...we're just too stupid to do anything about it.  So if you want an answer to why this is happening........just look in the mirror.  Any's too late to bicker....just live, learn and act, before it's too late.
Jan 2, 2013 3:57PM
No matter what, the GOP has to cut from Social Security, whether it is tax or something else.  I am sick and tired of our politicians.  They just received a raise and are taxing us all more.
Jan 2, 2013 3:49PM
Anyone who thinks Obama gives a damn about anyone but himself is a fool.  He doesn't care about the middle class, lower class, or any class.  The sooner the people who keep voting for him realize that, the sooner we'll have a real recovery.
Jan 2, 2013 3:43PM

But the wealthy really pay about the same tax rate as any poor smuck that is in the 28% or higher

bracket because of the cut off for Social Security & Medicare. That's assuming they even pay those taxes on their lower income.

With all the weeping for the rich no one ever mentioned they get ALL of the breaks from the lower tax rates.

Jan 2, 2013 3:43PM

Nice..Another half-assed attempt by BOTH sides of the political aisle to try and fix what THEY caused.


And now the debt can has been kicked down the road, past the "bridge out" sign, and it has plunged into the river.  The government will tax more, spend more, save LESS, and NOT reduce spending.  Numbers (factual) show that with this deal, you have a ratio of 1 dollar of savings, in comparison to 41 bucks of spending...


Now, for ALL of you dems AND rep's out there, do these numbers look balanced to you???


In 2 months from now, we will once again be at this point, where YOU elected officials won't have the balls to face the fact that the checks that Noblaba as well as YOUR congress has written, will need to be covered...


Or, will you spineless weasels actually do what needs to be done, which is cover the checks, and stop ALL OF THE WASTEFUL SPENDING...


So much for the "super-committee"...


We shall see...


Thanks guys...




A dis-satisfied customer and voter...

Jan 2, 2013 3:40PM
How about paying me back all of my Social Security I have paid into it for the last 24 years and I will invest it my way!
Jan 2, 2013 3:37PM
Mirage Guy this so called Ponzi scheme worked just fine until the crooks in Washington got their hands in the cookie jar, taking bits and pieces of it out for their own gain.
Jan 2, 2013 3:34PM
Yes Barry, in Socialism the rich do get poorer,
but always remember the poor get poorer too and they have less of a cushion.
Barry and all the other college professors forgot that last part unfortunately,,,, for us.
Jan 2, 2013 3:33PM
YES, I will miss it. Now my $27.00 per week will go to a piece of crap on welfare, which is what Obama wants anyway. I'd feel better if SS would actually be there WHEN I RETIRE 30 years from now, but I'll be lucky to get a 6 pack of beer for all the $$ I'll put in over the years.
Jan 2, 2013 3:24PM
Guess I can't send that hooker to school anymore, thanks Barry =0p
Jan 2, 2013 3:19PM
The WWII generation built the greatest country in the history of Man. Their entitled kids destroyed it
Jan 2, 2013 3:19PM

Hey Government....there has got to be other ways to balance a budget.  I can think of a few right off the top of my head:

1).  Get rid of some of the fat cat worthless politicians we have in this country (that should save millions of taxpayer dollars)

2).  Since the USA is in such a fiscal mess stop giving money to other countries until we get back on our own feet (if you saw the billions we give away to countries that pretty much hate us we would probably have a "surplus" instead of a "deficit"

3).  Make the USA more reliant on itself...we have farms, dairy, OIL etc. that we export instead of caring for ourselves & in the process more jobs would be created (especially in the Energy sector).

4).  Control Wall Street better so these false shortages or "I think scenarios" would not artificially pump up prices that ultimately hurts the US public (consumers).


Probably none of this would happen because it goes against everything Washington stands for!!!

Jan 2, 2013 3:16PM
The SS reduction was always meant to be temporary anyways. If you;'d tucked the money into savings like any smart person would have done, you now have a little bump money.if you spent it like you were going to have it forever you were just stupid to begin with. 
Jan 2, 2013 3:14PM
I gained $45/paycheck and applied it to paying down debt. I will miss it, having two more cards that will now be paid off in May instead of February. I bet the $400,000+er's don't have much an issue with theirs. They should just conceed on SS cuts. Most of us under 40 never expected it to be there for us anyways and the rich have their own savings accounts and funds. If you tell me SS can be made solvent by extending the qualifying age feel free. 401-K's and savings account will fill the void for I hope 5 years until it kicks in. I'd rather have my money now, non-SS retirement has been a scheduled plan for a decade now. I'll take it at 72 if I can have my $2200 back.  
Jan 2, 2013 3:14PM
Stop the social security Ponzi Scheme NOW!!!
Jan 2, 2013 3:11PM

More of the same old bad news for those of us who are footing the bills for Romney's 47%. They will not be experiencing increased taxes, they will not be experiencing cuts to their EBT cards. The entitlement class couldn't care less. Myself, I shall miss the 2% taken out of my disposable income. The Republicans should not have given in to this president. Where are the spending cuts we were promised?

Jan 2, 2013 3:09PM
I was just told by accounting that I will be missing over $200 a month out of my paycheck because of this. I wonder how much our over paid politicians will be missing.

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!!!
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
100 character limit
Are you sure you want to delete this comment?


Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.


Smart Spending brings you the best money-saving tips from MSN Money and the rest of the Web. Join the conversation on Facebook and follow us on Twitter.