Written by FrontPage Detroit
I've had many conversations with my friends since the beginning of the year and almost all of them inevitably included the question: "What happened to my paycheck?" As many of you have already noticed, your paycheck has shrunk between the end of 2012 and the beginning of 2013. My friend and I had a 30-minute vent session about how many things we won't be able to do or buy because our paychecks are smaller.
Most people did not realize that the fiscal cliff discussions only focused on the Bush-era tax implications on the marginal income. Marginal tax is the tax paid on each additional dollar of income. The discussions late last year were primarily aimed at raising the marginal tax rate for the wealthier Americans. What most people didn't realize was that the payroll tax holiday would not be extended, which resulted in a tax increase for all Americans who pay the payroll tax.
Payroll tax generally appears on most pay stubs as FICA and it is comprised of two parts: 6.2% for Social Security (up to $$113,700 in income) and 1.45% (unlimited income) to fund Medicare. Therefore, the total employee responsibility is 7.65%. The employer also pays 7.65% for a grand total 15.3%. For 2011 and 2012, the government reduced the employee paid Social Security portion of the payroll tax by two percentage points from 6.2% to 4.2% to stimulate the economy. This resulted in an additional 2% of take home pay for everyone who pays payroll tax. This holiday was scheduled to expire in 2011 but was extended to 2012. However, the payroll tax holiday was allowed to expire in 2012. This resulted in a decrease between $20 per month to $200 per month depending on income level.
Although this was a temporary tax holiday, most people got used to their new takehome pay under the payroll tax holiday. According to the February 7, Wall Street Journal article "Tax Holiday Ends, Customers Skimp," the impact of the payroll tax holiday expiration complicates budgets even more because the price of gas is also going up. Gas is up 7% this year.
What does this mean for you now? You need to reevaluate your spending habits with the new income levels. For example, if you have an income of $75,000 then, assuming no pre-tax retirement savings or other pre-tax items that reduce your adjusted gross income, your after-tax income will be $1,500 less per year ($125 per month). As you go through your spending look for items or services that you started to buy in 2011. These are good candidates for elimination because you lived without them before. Also, look to see if you can eliminate waste in your budget. Do you frequently waste food or buy clothing that you will never wear? Can you reduce the number of times that you buy lunch or go out to dinner? Pay attention to the small expenses because they will add up. It may be painful now but eventually you will adjust to your revised spending habits.