Finance & Enjoyment Blog

The 2% Payroll Tax Cut And You

Much talk has been made lately of the 2% payroll tax cut that has been the holdup in Congress over the past month. At face value, the common employee would assume this will result in a straight 2% increase in their take-home pay, but there are many other factors involved that also affect this amount. Additionally, this does not extend to the employer, so that rate remains at 6.2%.

First of all, this cut has been in effect since 2011 so what Congress was actually fighting over was whether or not to return to the rate to pre-2011 rates. This payroll tax is solely tied to Social Security, and anyone who makes over $106,800 does not get taxed on any amounts over that threshold. In other words, once they pay $4,485.60 in Social Security tax, they are not obligated to pay anymore for the year. Also, any fringe benefits will be added to the employee’s wage base for Social Security. For example, if they make $50,000 a year and have $10,000 in fringe benefits, then their Social Security tax will be $2,520 [(50,000+10,000) * .042]

As for the employer side, their Social Security matching rate remains at 6.2%. Not many people understand that payroll taxes for Medicare and Social Security are a two sided payment that the employer used to match and now exceeds. Going back to the earlier example, an employee with $60,000 in taxable wages would pay $2,520 while their employer would include an additional payment of $3,720 ($60,000 * .062) for a total of $6,240. Under the old rates, this would’ve been a payment of $7,440, but now the difference will be going to the employee rather than the Social Security Trust Fund.

Posted in Your Financial House » Rules and Regulations »

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