How much will payroll tax hikes cost you?(Read article summary)
Higher payroll taxes will take $115 billion out of workers’ pockets this year and cut consumer spending, according to the Tax Policy Center.
2013 is a tough year if you owe payroll tax, as most of us do. Not only did the 2010 payroll tax cut die at the end of 2012, but high-income workers now owe an extra 0.9 percent, thanks to the Affordable Care Act. Economists worry about what the combined new taxes will mean for workers’ net pay, consumer spending, and an economy still trying to get its footing. Now the Tax Policy Center’s updated Payroll Tax Calculator shows just what the tax hit means for individual households.
The 2010 tax act cut the workers’ rate for the Social Security payroll tax from 6.2 percent to 4.2 percent for 2011 and 2012. Congress allowed the reduced rate to expire as scheduled at the beginning of this year. The Tax Policy Center has estimated that the higher tax rate will take $115 billion out of workers’ pockets this year and cut consumer spending.
The ACA created a new “additional Medicare tax” that kicked in for the first time in January. Individuals earning more than $200,000 and couples earning more than $250,000 now pay a 0.9 percent tax on earnings above those thresholds. Few of us will pay the new tax, but it will nip at high earners’ wallets.
Finally, the cap on earnings subject to the Social Security payroll tax increased from $110,100 to $113,700.
A few examples illustrate the impact on workers (ignoring changes in income tax withholding):
- A worker earning a $40,000 median wage will take home $800 less this year than in 2012, a 2.3 percent reduction caused entirely by the expiration of the payroll tax cut.
- A single high-earner making $120,000 will see her payroll tax bill jump more than $2,400, a 2.5 percent cut in take-home pay. For her, the culprits are the higher tax rate and the higher income cap.
- A high-earning couple with each spouse earning $200,000 will pay about $5,300 more Social Security tax and $1,350 for the additional Medicare tax, reducing their net pay by 1.8 percent. They get hit by all three changes.
Try out our new calculator and see how the higher payroll taxes will affect your bottom line.