Why Is My Paycheck Smaller? Understanding Your 2013 Paycheck

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Why is my paycheck smaller in 2013If 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 :)

photo by: AshTR

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About Lance Cothern

Lance Cothern, a Certified Public Accountant (CPA) licensed in the Commonwealth of Virginia, is the founder of Money Manifesto. You can read more about him here or connect with him on Facebook, Twitter, Google+ or Pinterest.

Comments

  1. I hope everyone has been saving that tax break over the last couple of years as no matter which way I look at it I can only see taxes going up and benefits going down.

  2. I was expecting this to happen as well and really does not surprise me. As we’re self employed we really feel this, but we already had been pulling the extra 2% out for quarterly payments anyway. Personally, I am happy that they indexed AMT for inflation so we don’t have to deal with the whole patch thing each year.

  3. The good news is my paycheck did not change much! I am not in the Social Security system, but my 403B increased with the contribution limit. I haven’t seen an increase in years. One of the shortcomings of working as a teacher. Maybe it is possible before I retire in 5 years!

  4. Great article on all of this Lance. Being self employed I wont really see the true effects until I pay my 2013 taxes.

  5. We saw our paycheck go down (due to the SS tax and increased medical insurance costs), but we simply re-worked the numbers in our budget and it isn’t that big a deal. I agree with Glen that taxes will keep going up. But, if you have a plan you can work around it and not suffer:)

  6. Hi Lance,

    Thanks for the super helpful explanation! Our monthly income will drop $310 combined between my husband and myself. Part of that is due to the tax adjustments and some to insurance costs. I’m bummed because it will temporarily slow down our debt pay off plan, but I’m grateful it won’t be forever. By late summer we’ll be back on track since we won’t be paying for full-time daycare for our son thanks to all day Kindergarten. I’m sure it’s a tough adjustment for some families.

  7. My paycheck dropped by $50 and I was so annoyed. But then I thought that the rates are just back to what they were at before, so I didn’t mind as much!

    • I hadn’t worked too long at the old rate so the new rate was nice. Now that’d we’re back to the old rate and I’ve increase my retirement contributions I’m going to have to adjust my budget!

  8. I completely forgot that this was going to happen. When I got my check, I thought, “Oh great Payroll messed up again”. It’s only about $50 less, but like you said when you planned on making that $50 it’s a little annoying. I’m used to my check going up, not down.

  9. I knew the payroll tax was expiring but I have to admit I was not prepared for it because when I saw my smaller paycheck I was shocked at how much of a difference it made. Just the same, I feel it was time to end it. I am REALLY happy that dividends are staying at 15% (below $400K). It seems to me that a lower dividend rate is much better for the economy.

  10. Anna Blake says:

    A lot of people at work are saying their paychecks were a lot smaller, I understand teh 2% increase but it is not that much more. I only make 65K a year, and based on that it should only be around $50.00 less of my paycheck but for some reason, $150.00 more went to federal taxes. I do not understand why. Nothing has changed for me, my exemptions are still the same. Other coworkers said their paychecks were $400 – $500 shorter and they do not make over $400.00 or close to it and when you apply the 2% it is still not that much. So why so much more going to fedearl taxes that is not social security?

    • Anna that is interesting. Federal taxes may have gone up just a bit when the tax brackets were adjusted for inflation but I wouldn’t imagine it’d be that extreme. I’d suggest talking to your payroll/human resources department to see if they have an explanation. There may have been something very specific that happened at your company. Another possibility is they adjusted their payroll system as if the tax extension didn’t pass and they now need some time to adjust to the new withholding. Unfortunately I don’t know your specific situation so I don’t have the answer but I’d definitely get in touch with HR/Payroll.

    • Tuxandralynn says:

      $50 is how much it’s been pulling from me every two weeks… and I make less than $800 a month… with two dependents (my toddlers)… I can’t imagine how that equals 6.2%!

  11. Wow my husband gets paid twice a month and his pay was cut $250 each check…$500 a month. Thats going to hit hard. Good thing weve been paying down debt and moved into a smaller home that is 1/2 the cost, otherwise we would be in serious trouble. Living below your means has been a great experience and a good life lesson for our children!

  12. HI we are in CA and my husbands paycheck went down $516 dollars per pay check – that is a huge chunk I was thinking we should change are deductions and think now we are claiming 4 – for a family of 4 can you advise how many we should claim. I have been to the IRS site and they say like at 10 more but that sounds crazy. Thanks

    • TC,

      That is a major bummer your husband’s paycheck went down so far! Unfortunately I can’t advise you on how many deductions to take because I don’t know your full situation. I’d suggest filling out the worksheet on form W-4 and the California equivalent to see what the IRS suggests.

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