What Goes Down, Will likely Go Back Up Including Payroll Tax Cuts

If you’re like me, you might have been holding your breath just a bit as Congress debated as to whether or not to extend the payroll tax cut extension for the remainder of 2012.  And of course, the good news is...they did.  Actually, I found it quite refreshing as both sides of Congress put differences aside in a rare display of bipartisanship and chose to do what was right for the American people.  Good for them.  Good for us!

The original payroll tax break in 2011 cut 2% from payroll taxes used to pay for Social Security, lowering the tax rate for 160 million Americans. The tax break was extended for two months at the end of last year.  And last month, under the Middle Class Tax Relief and Job Creation Act of 2012 workers will continue to receive larger paychecks for the rest of this year based on a lower social security tax withholding rate of 4.2%. No action is required by workers to continue receiving the payroll tax cut, and as before, the lower rate will have no effect on worker’s future Social Security benefits. The reduction in revenues to the Social Security Trust Fund will be made up by transfers from the General Fund. 

For an employee earning $50,000 a year that means keeping an extra $80 a month in take-home pay. For higher-income employees, that extra income could be as high as $2,200 a year, and with the rising cost of groceries and gas, well it certainly can’t hurt.  In addition, more people spending more money will add a needed boost to a sluggish economy – which was the initial intent of the tax cut.  But beware.  The tax cut is still temporary and once it has expired, and our paychecks have been reduced, we may find it harder to adjust our spending back down.

It’s not that we consumers are necessarily consciously choosing to spend the extra cash. In all likelihood, we may not even have noticed the difference in our paychecks. It’s just that money tends to be spent unless we make an effort to set it aside.   While saving is never as much fun as spending, we might consider using that extra money to pay down high-interest debt, increase contributions to flex or health savings accounts, or since it is Social Security tax money, we might think about adding to our retirement accounts.  The important thing to remember is that this payroll tax cut is only temporary and will most likely be adjusted accordingly next year, and that could mean a decrease in our take home pay.


Kathi Koenig, CPA
Partner - McGowen, Hurst, Clark & Smith, P.C.