I don’t know if you heard, but the AARP does not support an extension of the Social Security tax cut scheduled to expire at the end of 2012. Neither does the Obama administration. Romney remains silent on the matter which is likely confirmation that he doesn’t either. Without an extension, every working American will pay an additional 2% in tax starting on 1/1/2013. Experts say that the average American will pay an additional $1,000 annually as a result of this tax cut expiration – a $38.46 reduction to your biweekly paycheck. You’ll feel the hit in the first paycheck in January as your take-home pay goes down.
To figure out the impact to your pocketbook, you can do a rough calculation using 2% of Social Security wages on last year’s W-2 (Box 3). For a per paycheck amount, just take the Social Security wages off a current pay stub times 2%. In 2012, you are only taxed (for Social Security purposes) on the first $110,100 of wages, so if you make more than that, your additional tax is $2,202.
If you want to get more precise or you are expecting different wages in 2013, you’ll need a bit of knowledge on the difference between Social Security wages and gross wages to do the calculation. Probably good to understand it anyway.
Start with gross wages (your salary including bonus). Subtract the employee cost of medical & dental insurance. Subtract any dependent care deductions. Subtract any parking or subway pass deductions. This calculation will get you pretty close to Social Security wages. Multiply by 2% to get the additional tax you’ll pay annually.
We don’t know what Congress will do, but experts seem to agree that the payroll tax holiday will not be extended. So plan ahead and include this additional tax in your budget for 2013.