If you’ve received your first paycheck of 2013 you’ve likely realized that your 2013 paycheck is smaller than your 2012 paychecks were. It is a sad realization but there are a few reasons why your paycheck may have gotten smaller in 2013.
Congress passed legislation to avoid the fiscal cliff and to avoid an increase in income tax rates on the majority of taxpayers. The key is they only prevented income tax rates from rising (assuming you make less than $400,000 as an individual or $450,000 for married taxpayers).
Why Your Paycheck Is Smaller in 2013
The most likely reason your paycheck is smaller in 2013 is the social security tax. In 2011 Congress passed a payroll tax cut in order to increase the take home pay of employees and help the economy. The employee portion of the social security (FICA) tax was reduced from 6.2% to 4.2%. Initially it was only supposed to last until the end of 2011 but it was extended until the end of 2012.
Over the last two years most people forgot about the payroll tax cut and incorporated this money into their budget but the tax cut was never a permanent reduction in the tax. When Congress passed the latest fiscal cliff legislation in early January 2013 they left out the payroll tax cut extension and the social security (FICA) tax went back to the normal rate of 6.2% from the reduced rate of 4.2%.
This expired payroll tax means that you actually had a tax increase of 2% in your paycheck compared to last year. No one likes getting a smaller paycheck but it is extremely unlikely that they’ll reenact the social security payroll tax cut so you’ll need to adjust to your new smaller paycheck.
Other Reasons Why Your Paycheck Is Smaller in 2013
The main reason most people will see smaller paychecks in 2013 is the social security (FICA) tax noted above but there are other reasons why your paycheck may be smaller in 2013.
If you pay for your benefits like health and dental insurance with deductions out of your paycheck it is possible that your benefits cost more in 2013 than in 2012. Personally, my health insurance premium increased and will make my paychecks smaller in 2013.
Another benefit that you may have forgotten about is your 401(k). Many 401(k)s have automatic contribution percentage increases on January 1, 2013. My company tries to get us to set up at least a 1% increase each year in our 401(k) contributions. If you forgot you had signed up for a similar program this may be another reason why your paycheck is smaller in 2013.
I Got a Raise for 2013 but My Paycheck Didn’t Increase
If your raise was around 2% you likely won’t see any of it. The increase in the social security (FICA) tax rate from 4.2% to 6.2% on January 1, 2013 will negate the effect of your raise. Add that tax increase to any increase in the cost of benefits or an increased 401(k) contribution percentage and your raise might not end up giving you any additional take home pay in 2013.
Other Updates with the Fiscal Cliff Legislation
There were quite a few changes in the fiscal cliff legislation and this CCH Tax Briefing explains them all in detail but I’ve highlighted a few of them below.
- Income tax rates remain the same for individuals making less than $400,000 and married filers making less than $450,000.
- “Marriage Penalty Relief” has been extended.
- The child tax credit is now permanently set at $1,000.
- Dividends and capital gains tax rates remain at 15% unless you make more than $400,000/$450,000.
- Permanent AMT (Alternative Minimum Tax) relief means that the AMT has been permanent indexed for inflation and Congress will no longer have to pass an annual patch to adjust it for inflation.
- The state and local sales tax itemized deduction option (instead of taking a state income tax itemized deduction) has been extended through 2013.
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Did your paycheck end up being smaller in 2013 or do you expect it to be smaller if you haven’t received one yet? What do you plan to do to make up for your smaller paychecks? If you have any specific questions let me know in the comments below and I’ll do my best to research and address them.
P.S. In case you were wondering… I did warn about this potentially happening a few months ago when I noted that you should be prepared for paycheck shrinkage on January 1, 2013… just sayin 🙂