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Home » Taxes

Social Security Payroll Tax Cuts Extended through the Rest of 2012: What will you do with your Extra 2%?

Last updated by on 8 Comments

Under the Middle Class Tax Relief and Job Creation Act of 2012, enacted this past week in a rare bi-partisan support (293 to 132 vote in the house), you will continue to pay 32% less in to Social Security for the rest of 2012.

The “Act” actually did a number of other things as well, including extending unemployment benefits, expanding high speed wireless broadband access, and increased the 2012 budget deficit.

But… who cares about that stuff?! More money for all of us! Gimme!

This is actually an extension of the Social Security payroll tax cuts that took effect last year.

Those tax cuts lowered the employee portion of Social Security to a withholding rate of 4.2% of taxable income versus the previous 6.2% rate prior to 2011.

The reduced rate was originally in effect for all of 2011 but had been reluctantly approved by Republicans on December 23rd through the end of February by the Temporary Payroll Tax Cut Continuation Act of 2011.

2012 Social Security payroll tax cut extension(Official White House Photo by Pete Souza)

What do you Need to do to Get the Payroll Tax Cut?

Nothing. As it is a payroll tax cut, you simply receive the additional income with each paycheck. Your employer still pays the full 6.2%, however, you only pay 4.2%.

What does this Mean for the Future of Social Security?

The government claims that the lower rate will have no effect on future Social Security benefits, however, that is hard to believe. I am not sure how the accounting works, but they claim that the reduction in revenues to the Social Security will be made up by transfers from the General Fund (in other words, more debt for the U.S.).

How Much will the Payroll Tax Cut Add to your Paycheck?

The Obama administration urged voters to share their stories on what the extra $40 per paycheck would mean to them (the $40 number assumes a $50,000 income).

The actual additional amount you could realize in your paycheck will vary. If you’re curious about how much extra this will mean for you, here is a payroll tax cut calculator.

Payroll Tax Cut Extension Discussion:

  • What will you do with the additional income?
  • Would you rather see this money go to Social Security or are you happy it’s coming back to you?

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8 Comments »
  • Kraig @ Young, Cheap Living says:

    Obviously, I like having this money coming back to me, although I do have concern over the future of social security. As my mom is facing a major, debilitating illness, I worry about her financial ability as she approaches retirement age, 5-8 years from now. The stories I heard while in college were pretty scary about the future of the social security program. I do hope it’s around in 10 years as like my mom, many other people approaching retirement may need it. I would rather the money come out of my check now than have to pay into it in increasing numbers sometime in the future when the program starts going broke.

  • I’m happy that the tax cut was extended through 2011, but it won’t change anything with how I spend money.

    I’m actually most concerned with what happens when the cut ends. Not for me personally, but for people that don’t realize that this tax cut is going to end at some point. That can be a significant blow to some people and I hope everyone plans appropriately and doesn’t rely on the tax cut too much.

    • G.E. Miller says:

      This is the problem with any kind of tax cut – it becomes the new norm. Witness millionaire tax breaks and capital gains taxes.

      • Jason says:

        The problem? Come on… Me keeping more of my own $ is a “norm” that I’m very happy to get used to.

        What are these “millionaire tax breaks” you speak of?

        With the top 5% paying 58% of all federal income I’d say it’s the “millionaires” that deserve a tax break.

        And let’s be clear about those “reluctant republicans”. They very much wanted to pass it. They wanted it to be for a full year and reduce spending at the same time to not contribute to the deficit.

  • David says:

    I don’t think the 2% will effect me at all. I will get the $40 and spend it on gas. In reality I would rather the money went to support social security or medicare, I think these are important programs that save the lives of thousands of elderly, and hopefully me too when I become elderly.

  • Leigh says:

    I will continue saving the extra income as I did all last year. I’m working to beef up my down payment savings account for when I find another condo to buy (first attempt didn’t close). Every extra bit helps!

    That said, I am torn on the extension. I don’t need the extra $100 or so each month (though I’ll gladly take it if they’re giving it to me) and I will be just fine at funding my own retirement. On the other hand, I don’t want to see the government going into debt to be able to afford the Social Security payouts – there is a reason why it was set at the 6.2% level that it was.

  • Mike says:

    Probably save it for the inevitable rise in taxes and inflation.

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