Payroll Tax Cut Debate

7 Jan

What is exactly the payroll tax cut?

A tax cut is a reduction in taxes. The payroll tax cut for individuals was originally passed at the end of 2010 to help enhance the economy. Since the recovery has been very slow, many politicians were in favor of extending the tax cut by another year. Many economists worry that the tax cut expiration can negatively affect already struggling economy.

How does it affect you?

The payroll tax cut reduced the amount that you, as an employee, had to pay toward Social Security. The standard withholding rate of 6.2% of your first $106,800 in wages was reduced to 4.2%. In 2012, the taxable wage base increased to $110,100.
To put it simply, under the current tax cuts, for every $1,000 you earn, $42 is withheld and $20 stays in your pocket.

The reduced 4.2% Social Security tax rate will remain in effect at least through February If the tax cut is not extended afterwards, you will pay ‘the extra’ 2 percentage points of your income which can add up to $2,200. If the tax cut is extended, you won’t see any difference in your tax liability in 2012.

On the other hand the payroll tax funds Social Security program. The reduction in the withholding rate transferred $105 billion out of Social Security. This tax holiday will reduce the solvency of Social Security solvency by 13 years!

Most experts believe we should trim Social Security benefits or raise taxes that fund the program. Currently we’re cutting those taxes. Originally, the tax cut was supposed to be effective for just one year, but now we are considering the indefinite extension.

Image credit


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: