Last year we wrote about how Congress and President Obama had passed a temporary (?) payroll tax holiday for 2011, whereby taxpayers would see a 2% cut in the social security portion of their payroll taxes. The cuts meant that Americans would see a few more dollars in every paycheck, while social security deposits would decrease for the year.
In December of 2011 Congress was faced with an expiring tax cut for all taxpayers. While there was some serious discussion surrounding whether a tax cut should be extended at all, Congress ended up enacting a two month extension of the payroll tax cut. That means that they would have to revisit the issue in February of 2012 before it expired.
This week as the deadline started creeping closer Congress enacted legislation in order to renew the payroll tax cut for the rest of the 2012 tax year.
2012 Payroll Tax Cut
After some debate this week Congress passed legislation to extend the payroll tax cut through the end of the year, as well as renewing jobless benefits for millions of unemployed. From FoxNews:
Congress has passed an extension of the payroll tax cut and long-term jobless benefits, handing to President Obama one of his election-year priorities despite widespread concerns about the bill’s deficit implications.
The Senate approved the bill Friday afternoon on a 60-36 vote. The $143 billion package, which also would forestall deep cuts in Medicare reimbursements to doctors, would extend the 2-percentage-point payroll tax cut for the rest of 2012.
The House earlier approved the bill on a 293-132 vote. Obama is expected to sign the bill, after having made the yearlong extension a cornerstone of the jobs package he outlined in September.
So the cuts are extended through the end of the year, as well as seeing a renewal of jobless benefits for the long term unemployed and a stall in deep cuts in Medicare reimbursements.
Election Year Helped Cut Pass
While there was quite a bit of opposition to the bill from Republicans, there was little will to come out against the payroll tax cuts in an election year. After the battle in December to block a 2 month extension of the payroll tax cut, and how it played so negatively with the electorate, they decided to give this extension a flyer.
“We don’t control Washington. Democrats still control Washington — they control the Senate and they control the White House,” said Rep. Dave Camp, R-Mich., the top House negotiators on the measure. “A divided government must still govern.” Camp cited stricter job search requirements for people receiving unemployment benefits and other reforms to the program as wins for conservatives.
How Much Extra Does The Tax Cut Mean?
If the tax cut had expired it would have meant an increase of 2% in payroll taxes. In other words in the FICA portion of your paycheck tax withholding the Social Security portion would have increased to 6.2% from 4.2%. The taxes going to Medicare funding, the other 1.45% of your FICA taxes, would have remained unchanged.
Since the legislation means the tax cut will remain unchanged, your paycheck won’t be seeing any changes.
NOTE: The average taxpayer sees around a $1000 tax savings because of the payroll tax cut. Social Security taxes are capped at an income of $106,800. So the maximum savings seen by a higher income individual due to the tax cut is around $2136.
UPDATE 1/1/2013: As of 12/31/2012 the 2% payroll tax cut was not extended and is no longer available after fiscal cliff legislation did not include an extension of the payroll tax cut. Most taxpayers will see an increase in taxes due to the payroll tax cut in 2013. Most will pay on average $800-1000 more.