President Obama announced today that he wants to extend and expand a payroll tax cut that is scheduled to expire at the end of the year. On this one point it looks like he may just get his way. The current tax cut, which is one year reduction for calendar 2011, applies only to workers and reduces Social Security taxes from 6.2 percent to 4.2 percent. Employers still pay the 6.2 percent rate, which is applied to wages up to $106,800. Obama is proposing to extend the tax cut for a year and make it bigger — reducing the Social Security taxes paid by workers to 3.1 percent. The plan would also reduce Social Security taxes paid by small businesses from 6.2 percent to 3.1 percent. The merits of such a plan on a macro scale will be debated but this is welcoming news for many small businesses and the average worker.
The existing one-year break for taxpayers was created under The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. In terms of dollars, it is good news for wages at the middle and towards the top. A taxpayer making $50,000 per year is now saving $1,000 (2% of $50,000). A married couple who each makes $100,000, is saving a combined $4,000 (2% of $200,000). At the low end, though, taxpayers miss out. At least compared to the 2010 version of wage tax relief. The Making Work Pay Credit was in place for calendar 2010 and was a flat $400 for individuals and $800 for married couples. Taxpayers at the lower end could get the full credit even if they didn’t make that much money.
The current tax relief also benefits self employed individuals. Instead of paying self-employment tax of 12.4% for the year, the amount is reduced to 10.4%. That reflects the same 2% discount as employees receive. It does not provide relief to anyone not participating in the social security system such as federal employees. Expect the new 2012 policy to be more of the same with savings increasing substantially.
The proposed new tax cut is part of a package of nearly $450 billion in tax reductions and new federal spending in an effort to revive the weak economy. Obama thinks that the plan “will provide a tax break for companies who hire new workers, and it will cut payroll taxes in half for every working American and every small business. It will provide a jolt to an economy that has stalled, and give companies confidence that if they invest and if they hire, there will be customers for their products and services.” The goal is to increase take-home pay for workers in the hope they will spend the money, creating more demand for consumer goods and services. Workers making $50,000 a year would see their take-home pay boosted by $1,550; those making $100,000 would get $3,100. Economists say the president’s jobs package could go a long way toward preventing the economy from getting worse, but it might be asking too much for the package to significantly boost job growth.
I don’t know about boosting job growth but it does look like there will be a few more dollars in our paychecks though 2012. If you are not already doing so you may want to consider appropriating that money for something specific. That way you don’t fall into the trap of habitually spending money that is only there on a temporary basis. The ideal scenario is applying those funds directly to a high interest credit card or towards a retirement plan such as a 401K or on IRA. However ,if you want to get more in the spirit of the stimulus then spend it! But maybe accumulate the savings separately and spend it knowing it is tax relief money.