Personal Finance

Is a Payroll Tax Hike Coming?

An eerie silence surrounds a subject you'd think would be a hot political issue in this overheated presidential election year: The threat of a $110 billion to $120 billion tax increase on workers, whether they are poor, middle-class or among the highest earners.

CALCULATOR: How Much Would a Payroll Tax Hike Cost You?

As things stand now, the two-year payroll tax holiday -- which cut the Social Security tax on wages from 6.2% to 4.2% -- is scheduled to end on December 31. If that happens, the new year will bring a tax increase for 160 million workers. Someone making $50,000 a year would pay an extra $1,000 in taxes in 2013, reducing monthly take-home pay by $83.33. The tax-hike-induced pay cut would arrive just as holiday bills are coming due.

Of course, the same threat existed at this time last year. The payroll tax holiday was originally supposed to be in effect only for 2011 (it was something of a replacement for the "making work pay" tax credit, which cut taxes in 2009 and 2010 with the aim of helping dig the economy out of the Great Recession). To no one's surprise, however, politicians moving into the election year decided to extend the break through 2012.

But it appears that this year's surprise could well be that the temporary tax cut will actually be temporary, and the rate will jump back up to 6.2% on January 1.

Notice that the campaign trail is not littered with promises to extend the holiday again. Despite repeatedly promising in the first two Presidential debates not to raise taxes on middle-class Americans, for example, neither President Obama nor former Governor Romney uttered a word of support for extending the payroll tax holiday.

AARP has also come out against an extension of the holiday. Its CEO, A. Barry Rand, recently sent a letter to the White House and all members of Congress calling for the holiday to end on schedule on New Year's eve. "Further extension of the payroll tax holiday would undermine confidence in Social Security," Rand wrote, "and put at risk the program's dedicated funding stream and the hard-earned benefits of millions of Americans and their families."

There's always a chance that worry about the potential economic damage wrought by sucking $110 billion out of workers' paychecks will prompt lawmakers to extend the tax holiday into next year. But if they don't, you'll feel the pain on the first payday of 2013.

The impact on your wallet

What would the return to a 6.2% payroll tax rate mean for your paychecks?

It's pretty simple to measure. Take your gross pay, reduce it by the amount you divert to flexible spending plans for medical and/or child care costs (since that money isn't hit by the payroll tax) and multiply the result by 0.02. Divide that amount by the number of times you're paid in a year and you'll know just how much your paychecks will shrink.

Don't trust yourself (or don't want to spend the time) to do the math? Then just use our new calculator: How Much the End of the Payroll Tax Holiday Will Cost You .

The table below will give you a quick look at the tax rate's impact at various salary levels. Once annual pay passes about $113,700, the pain stops. That's because there's a limit on how much wage or self-employment income is hit by the tax that pays for Social Security. For 2012, the tax stops when income passes $110,100; it's estimated that the cap will rise to $113,700 next year.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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