Tax Tips

Congress Returns to Battle Over Payroll Tax Cut

We expect that Congress will extend the payroll tax cut, which is set to expire at the end of February, through the end of 2012. But what if it doesn't? How much would gridlock cost you every payday?

By Kevin McCormally, Editorial Director, Kiplinger.com

January 20, 2012

The 112th Congress -- sporting a black-eye approval rating hovering around 13% -- has jumped right back into the muck it escaped just before Christmas: whether or not to extend the 2% payroll tax cut that saves the typical American worker $1,000 a year.

CALCULATOR: How Much Would a Payroll Tax Hike Cost You?

Although considered a no-brainer heading into an election year, the politicians almost let the tax cut expire at year-end. Had that happened, every working American's tax bill would have increased on January 1 as the employee share of Social Security tax on wages rose from 4.2% to 6.2% and the self-employment tax jumped from 10.4% to 12.4%.

At the very last moment, the lawmakers decided to extend the cut ... but only for two months. As the law stands now, the tax cut will end -- and your taxes will rise – on March 1. It has been widely reported that the tax hike would cost the "typical family" $1,000 a year. That assumes a worker makes $50,000. And because we're guaranteed two months' worth of the cut, the amount at risk for the rest of 2012 is $833. But, in fact, the hike would cost many of us far more.

The typical U.S. congressman or congresswoman, for example, stands to lose $1,835 if the cut isn't extended (that's 2% of the first $110,100 of pay, the maximum subject to the Social Security tax in 2012, minus the amount of the break delivered by the tax cut in January and February).

For a working couple in which both husband and wife make at least $110,100, the 2012 hit for allowing the tax cut to expire February 29 would be $3,670.

At Kiplinger, we don't think that will happen. But until Congress agrees on a way to pay for extending the tax cut, the threat exists.

We make it simple to see your personal stake in this battle. Just use our new calculator: How much will a payroll tax hike cost you?

Want to do the math yourself? Take your gross pay, reduce it by the amount you divert to flexible spending plans for medical and/or child care costs (since that money isn't hit by the payroll tax), and multiply the result by 0.02. If you're self-employed, make the same calculation based on your self-employment income. (In either case, don’t plug more than $91,746 into the calculation – that’s 83.33% of $110,100, taking into account the fact that the tax cut applies for the first two months of the year.) The result will tell you how much a 2% tax hike would cost you during the rest of 2012. If you have a working spouse, do the same calculation for your husband or wife.

Sneak preview: New tax benefits -- as well as burdens -- for 2012

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