In 2011, you may have noticed that your Social Security tax rate dropped from 6.2% to 4.2%. Combined with the Medicare tax of 1.45%, the total “FICA” tax was only 5.65% instead of the usual 7.65%.
The goal of the “holiday” was to put some extra dollars in every workers’ pockets in hopes of stimulating the economy. In 2012, Congress extended the temporary tax cut for another year.
Note 1: The tax rate did not get reduced for employers – so your employer has continued to pay the full 7.65% toward your retirement benefits.
Note 2: Even though all U.S. workers were taxed at a lower rate for 2011 and 2012, they still received full “credit” with the Social Security Administration – so you can rest assured that your retirement benefits will not be affected.
The “Holiday” Is Probably Over
Congressional leaders on both sides of the aisle have recently expressed support to discontinue the payroll tax holiday and raise Social Security tax rates back up to 6.2% for all workers. Combined with the Medicare tax rate of 1.45%, the total “FICA” tax withholdings would be 7.65% effective January 1, 2013.
It’s still possible the holiday could be extended another year, but don’t bet on it. Our government needs the money and most analysts have said the tax reduction did little to stimulate the economy.
Planning for the Worst-Case Scenario
We’re advising nannies to plan for the worst and hope for the best. Starting in January, be prepared for a reduction in your take-home pay. To calculate the change to your paycheck, multiply your annual wages by 2% (.02). For example, a worker making $40,000 per year was getting an $800 gift for each of the last two years. For 2013, that worker would need to plan on the $800 savings going away.
When lawmakers make a final decision, we’ll let Regarding Nannies know and our free paycheck calculator at www.mybreedlove.com will be updated.