Why Is My Paycheck Less This Month? Did My Taxes Just Go Up?

Earlier this month we were hearing a lot about the fiscal cliff legislation that was being debated in the hallowed halls of Congress. The general feel going around was that the measures being enacted were going to mean higher taxes mainly for those with high incomes, those making above around $400,000-$450,000 a year.

When the fiscal cliff legislation was finally completed and signed by the president, the folks in Washington D.C. were quick to start congratulating themselves on how they had saved the middle class from a fiscal nightmare, and how tax rates wouldn’t be going up on anyone who wasn’t making a higher than average income.

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Your Taxes Are Going Up This Year

The problem is that while the tax rates are staying the same for most of us,  it doesn’t mean our taxes aren’t going up. In fact, all of us with an earned income will be seeing less in our paychecks this year.

Payroll Tax Cut Expires and Paychecks DecreaseThese past few days we’ve heard an uproar as people started to get their first paychecks of the new year and quickly realized that they weren’t getting as much money deposited into their bank accounts.  People are seeing on average a reduction in their paychecks of around $80-100 a month!

What has happened to increase our taxes without our rates going up? While Congress extended and made the tax rates permanent for those making less than $400-450,000 they failed to extend the temporary payroll tax cut.  Because the payroll tax cut wasn’t extended again most of us will be paying 2% more in taxes this year.

Payroll Tax Cut Passed In 2010, Extended In 2011

President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act into law way back at the end of 2010. The law implemented a 2 year extension of the Bush era tax rates, extended expiring unemployment benefits, reinstated the estate tax and extended the $1000 child tax credit.  At the time the Making Work Pay tax credit, passed as part of one of the stimulus bills, was expiring.  It was  essentially a refundable tax credit of $400 for individuals and $800 for couples.  Obama wanted to pass something to replace it to blunt the impact of losing the extra $800 that most families were getting, and so the idea for the temporary payroll tax cut was born.

2011-2012 Payroll Tax Cut

To replace the Making Work Pay tax credit Obama and Congress passed the temporary payroll tax cut of 2% in 2010, to be effective for the 2011 tax year.  It was then extended for the 2012 tax year as well when the politicians decided that it might not be wise to let it expire in an election year.

So what exactly was cut in the payroll tax cut?  The FICA portion of your paycheck’s withheld taxes was cut by 2%.   That part of your taxes, which is typically 6.2% of your income and funds Social Security and Medicare, was dropped to 4.2%  for the 2011 and 2012 tax years.

What did the payroll tax cut mean for the average taxpayer? The tax cut meant around a $1000 annual tax savings. Since the Social Security tax is capped at $106,800, the maximum savings that could have been seen by a higher income individual was around $2136.

Payroll Tax Cut Not Extended In Fiscal Cliff Deal

So here it was two years later and people have gotten used to seeing that extra money in their paycheck.

When the fiscal cliff deal was passed the payroll tax cut was quietly allowed to expire.  Not many people realized this fact because everyone from the press to legislators didn’t really talk about it. Instead they trumpeted their success at “saving the middle class” from large tax hikes.

So here we are 2 weeks into the new year and most people have now received their first paycheck of the year. What did they find?  Most people are finding that their paychecks are a bit lighter – most are receiving about $80-100 less every month.  Of course this has most people upset because they didn’t even realize it was coming.

So now our paychecks are less, and we’re all set to see about $1000 less in income this year.  While I can’t say that I think this money wasn’t needed to fund the faltering Social Security and Medicare systems, it is frustrating to continually see our taxes increase.  Wouldn’t it be nice if they started cutting federal programs and actually tried to get the budget under control?

What are your thoughts about the payroll tax cut expiring? Did it catch you by surprise? 

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Last Edited: 15th January 2013

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Comments

    Share Your Thoughts:

  1. says

    It did not catch me by surprise as it was always communicated as being temporary. I know it’ll hurt many middle class families as it means a number of different things to them , or more creative budgeting. I think tax increases are inevitable in the long run as we’ve enjoyed lower taxes for some time.

  2. says

    I am paid bi-weekly and have seen around an $80 per paycheck decrease in take home pay. I think it is unfortunate, but the tax amount should have never been reduced in the first place if they didn’t plan on making it permanent.

    As always, middle class families are going to take the largest hit. We will have to tighten our budgets and make up for it somewhere else.

    Oliver

  3. says

    I am with John on this one. Yes, I understand that people are technically paying more, but this was never a permanent tax change. This was temporary and the only reason why it was extended for 2012 was due to the election. We need the money to fund SS and that is what it was used for. When I noticed more money in my paycheck, I decided to save it and not count it as my income because I knew it was going to be temporary. I feel sorry for the individuals that need the money, but you can’t blame washington for this issue, you have to blame yourself for not budgeting the loss.

  4. says

    I take a slightly different viewpoint. yes, the tax cut was temporary – but the whole reason it was done was to help struggling families who needed more money in their pockets. Our economy hasn’t improved to the point where the people who needed this help no longer need it. As I said in my post on this same subject yesterday – if you were in a position to save the 2% when the tax cut was enacted, then you aren’t who the tax cut was targeted for. I’m sure very few people thought that the economy would take this long to recover, but hopefully it will get going again soon.

  5. kalineras'mo, says

    my husbands paycheck has been reduced by $ 90.a week due to .the increase in payroll tax and the 30% increase in health care premiums [including disability,life insurance.] offered by his employer. He still is making contributions to his 401 k. My partime job has reduced my hours from 24 hrs a week to 8. I am currently searching for another job. But things are difficult. But we are lucky to have no credit card debt.

  6. Dave says

    I have to budget my monthly income and struggle making ends meet; How is it that our Federal Government is not able to budget the unbelievable amount of money they already steal and continue to need more. Who is being greedy here. I dont think I am for needing that extra money in my income when I have a budget plan. This Government is OUT OF CONTROL

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