Sorry to break the news to all of my American friends but starting January 1, 2013 your paycheck will likely be 2% smaller and that is on the conservative side. It could be even smaller than that! So what am I talking about and why should you care?
*UPDATE* I have written a new post “Why is My Paycheck Smaller? Understanding Your 2013 Paycheck” which explains exactly what happened after Congress passed the fiscal cliff legislation in early 2013. Make sure to check it out after you read this post if you want to know why your paycheck is (or likely will be) smaller in 2013. *UPDATE*
Payroll Tax Break Set to Expire
Way back in the beginning of 2011 a tax cut was enacted to stimulate the economy by increasing the take home pay of any employee who paid payroll taxes. The employee portion of the social security (FICA) tax was reduced from 6.2% to 4.2%. Employers still had to pay their full portion at 6.2%. If you were self employed and paid both sides of the social security tax it was reduced from 12.4% to 10.4%. It was originally supposed to last one year but was extended to last until the end of 2012.
Over this time period many people have forgotten about this extra money in their paychecks and it has become just like any other income. People have figured it into their budgets and don’t expect it to disappear. The problem with this is that it was a temporary cut that was extended. It was never meant to be permanent but most people probably expect it to never go away.
It is unfortunate for your paycheck but it sounds like this temporary tax break is not going to be renewed this year. Congress doesn’t seem to want to extend it and they have enough other issues to deal with in regards to the “fiscal cliff”. Paying more taxes is never fun at least you’re now aware of your pending smaller paychecks starting in 2013.
Other Tax Provisions
There are many other tax provisions set to expire at the end of 2012 that have not yet been dealt with. Income tax rates will revert to an older structure among many, many other changes. If you care to read up on it here is a report from Congressional Research Service that explains an overview of tax provisions expiring in 2012. I wouldn’t count on Congress fixing all of these problems before the end of the year, if any, so you need to be prepared.
How to Prepare
If you assume the worst case scenario (for your paycheck) that none of these measures get extended you must now face the reality that your paycheck will be smaller next year. Bummer. So what do you do? You make a new budget and prepare to cut back. To be as accurate as possible you’ll need to study all of the tax law changes and see which changes will affect your paycheck.
You’ll at least be taking a 2% hit if you are an employee that is paid wages that are equal to or below the social security wage base ($113,700). Figure out what this 2% (or total change if you’ve calculated it) equates to and draft a new budget with your new lower income. If you’re lucky enough to get a raise this year you might just come out even… if Congress can fix everything but the temporary payroll tax cut extension.
They key is to be prepared. You are now aware that your paycheck will likely be smaller next year so start planning now!
Were you aware your check was going to be smaller? Have you planned for it?