Fiscal Cliff Impact: Why Your Payroll Tax Will Rise This Year

The fiscal cliff deal didn't touch the Social Security payroll tax increase

Lawmakers averted the fiscal cliff by raising income taxes on the wealthy, but in this deal everyone's taking a hit. That's because Social Security payroll taxes are going up for all American workers. Here's what you need to know.

What is the Social Security payroll tax?

It funds Social Security through a tax on wages, split by employers and workers.

What changed?

In 2011, President Barack Obama pushed for, and Congress enacted, a temporary reduction to the amount of payroll taxes that workers must pay. The cut, known as a tax holiday, eased the burden from 6.2 percent to 4.2 percent of a worker's salary (the employers' rate remained at 6.2 percent). That rate was extended through the end of 2012. The point was to stimulate the economy by giving workers more take-home pay – about $1,000 a year for someone with a $50,000 salary. Because the new fiscal-cliff legislation does not extend the payroll tax reduction again, that holiday has ended.

How much is the payroll tax going up, and who will be impacted?

Workers’ share now returns to 6.2 percent. Just about all of the country's 160 million wage earners will be affected, according to Joseph Rosenberg, a researcher at the nonpartisan Tax Policy Center. The Wall Street Journal has a handy calculator that tells you exactly how much more you'll have to pay in payroll taxes.

How bad is the impact, and when will it begin?

The new rate covers salaries up to $113,700, meaning the biggest increase a single wage-earner will have to pay is $2,274. Married couples who both earn above that maximum amount will each have to pay, Rosenberg said. Employers have until mid-February to begin taking the added money out of paychecks.

Is there any way, realistically, that the 2011 rate will return?

Not anytime soon. There was no serious talk during the fiscal cliff negotiations about extending the payroll tax cut; it just wasn’t on either party’s priority list. So there isn’t much chance that the cut will be revisited now that the deal is done.

Where can I find more information?

Check out the Internal Revenue Service's new guide here, and the Tax Policy Center's tax calculator here.

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The Associated Press contributed reporting.

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