Social Security payroll tax holiday set to expire
Unless you scrutinize your paycheck regularly, or follow Social Security news on a regular basis, there’s a good chance that you are not aware of the “Social Security payroll tax holiday” for 2011 and the political battle surrounding it now.
Incorporated into the George W. Bush income tax cuts in 2010, Congress approved a one-year tax holiday on Social Security contributions (known as FICA deductions) for 2011.
This FICA holiday reduced Social Security taxes from the previous (?) years customary deduction for FICA from 6.2% of earned income to a maximum of $106, 800 in 2011. In 2011 that contribution dropped two full percentage points to 4.2% of earnings up to $106, 800. For workers earning the average pay, this amounted to approximately $934. For workers earning the maximum amount of FICA eligible pay, the annual savings would be as high as $6,621.
If the proposed FICA tax holiday is allowed to expire at the end of 2011, in 2012 there will be some unhappy employees across the land. This week, Congress was supposed to address an extension of the tax holiday for 2012. Earlier this week, Congress announced that they are deadlocked and unable to come to agreement.
So what’s next? The end of the year is fast approaching, and unless something is done, the FICA tax will revert to 6.2% of the 2012 limit of 110, 100.
President Obama incorporated an extension of the tax holiday in the American Jobs Act. Congress has not passed this law but has agreed to review each provision separately.
Democrats are pushing Congress hard to extend, and possibly increase, the FICA tax holiday.
In one camp, the difficult employment market argues for a continuation of the FICA tax holiday, which would potentilly increase workers’ purchasing poswer. This would, hopefully, provide economic stimulus.
In the other camp, this tax extension is anticipated to cost approximately $100 billion. As America’s national debt rises, those who feel that that is the USA’s top priority prefer to let the holiday expire.
Yet another group who are concerned about the solvency of Social Security also fear that a continuing tax holiday may further weaken Social Security. According to Eric Kingson, co-director of Social Security Works, “If the tax cuts became permanent, and if a future Congress chose not to continue to reimburse the Social Security Trust Funds for the lost revenue, today’s manageable shortfall would double, becoming much less manageable.”
Stay tuned, as this week will likely be finalized either way!
Note: For purposes of this article, all calculations refer to W-2 earned income. Self-employment and other types of income have different rules.