The questions are already rolling in: why did my pay drop?
Tax policy can be complex and overwhelming, and for most Americans it boils down to what they see on their paystub. Most Americans will see their pay drop by about 2 percent in 2013 due to the expiration of the payroll tax holiday as part of the fiscal cliff deal.
What is the payroll tax?
Appearing on many paystubs as FICA, Med-FICA, OASDI, Social Security, or Medicare, most Americans have 6.2 percent of their paychecks withheld to fund Social Security (payments to retired and disabled individuals) and another 1.45 percent withheld to fund Medicare (health care for the elderly), for a combined 7.65 percent. Employers also contribute an additional 7.65 percent. Together, these taxes raise nearly $1 trillion per year.
What was the payroll tax holiday?
The payroll tax holiday was enacted in 2011, which reduced the employee share of the Social Security payroll tax from 6.2 percent to 4.2 percent. The holiday was not renewed when it expired at the end of 2012.
The payroll tax holiday replaced the previous Making Work Pay tax credit, which itself was adopted in 2009. That credit refunded 6.2 percent of a taxpayer’s earnings up to $400 ($800 for a married couple), with the credit phased out for those earning over $75,000 ($150,000 for a married couple) and eliminated entirely for those earning over $95,000 ($190,000 for a married couple). Put succinctly, the credit refunded the Social Security tax paid on income up to $6,500 for all but high-income earners. The credit was also refundable, meaning that those with no tax liability could still receive the credit.