18 Dec Has your Paycheck Gone Down in 2013?
Payroll Tax Holiday Expires
Fiscal Cliff Deal Does Not Extend Payroll Tax Cut of 2%
Smith, Kunz has received numerous calls from clients wondering why their checks are lower in 2013 than they were in 2012. This is due to the expiration of the 2 percent payroll tax holiday, which ended in 2012. This has surprised many, as news outlets reported that the fiscal cliff resolution resulted in higher taxes for the wealthy, not the average American worker.
The deal negotiated by Vice President Biden and Senate Minority Leader Mitch McConnell (R-Ky.) addressed a separate tax — the income tax — and prevented income tax rates from increasing for all but the wealthiest Americans. But, both sides decided to leave the payroll tax out of the agreement.
Unlike income taxes, which rise along with a worker’s income, the payroll tax is a fixed percentage of an employee’s salary. Allowing the tax cut to expire increases taxes on wages and salaries by 2 percent for every American worker.
With the end of the payroll tax holiday, a worker earning $50,000, for instance, will pay $1,000 more in taxes this year; a worker earning less than $20,000 a year will pay about $100 more. Someone in the upper fifth of households, making $150,000 a year, will pay about $2,200 more.
While the Obama administration fought for the payroll tax cut in previous years to goose a weak economic recovery, the White House has been more ambivalent this year. Before the election, even as prominent Democratic economists and lawmakers argued in favor of extending the tax cut, the White House declined to call for its renewal.
Republican lawmakers viewed the payroll tax holiday as contributing to federal deficits because the Treasury had to borrow money to replace payroll tax revenue, which ordinarily would go to fund Social Security.
Payroll taxes last went up in 1988, when they increased by 0.72 percentage points.
Middle-class Americans will not only be wrestling with higher taxes this year; they will also be earning less than they did just five years ago. “Many more households are living paycheck to paycheck than just a few years ago given the very tough economy and the decline in real incomes. This amplifies the negative fallout from the expiration of the payroll tax holiday,” said Mark Zandi, an economist with Moody’s Analytics. “The still very weak consumer confidence, due in part to lower real incomes, also reinforces the negative impact of the end of the holiday.”
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.
Again, this was something foreseen and agreed upon by both parties, but never highlighted as fiscal cliff negotiations took place.
Much of this post was taken from the following article in the Washington Post: Most will Face a Rare Tax Increase with or without ‘Fiscal Cliff’ Resolution
For more information on the Payroll Tax Holiday, call Smith, Kunz and Associates at (208) 356-8500. We are happy to answer any questions you have!