Payroll Tax Cut

What does the reduction of two percentage points of the Social Security Payroll tax mean for you. And does it replace the Working Work Pay Tax Credit? Find out on Paywizard.org.

The payroll tax cut was a 2 percent decrease in payroll taxes during the year 2011 and 2012 for workers who pay into Social Security. It meant a bigger paycheck for most workers during that period. The payroll tax cut expired at the end of December 2012.

Starting January 2013 workers will again have 6.2% of their wages up to $113.70 withheld to pay for Social Security, up from the 4.2% rate that's been in effect for the past two years.

The New York Times estimated that the payroll tax cut amounted savings up to $1,000 annually for a family earning $50,000 a year.

A family earning $70,000 saw $1,400 more in their paychecks. 

The payroll tax cut rule gave people with higher salaries a bigger monthly increase. The tax cut only applied to the first $110,100 earned, because that's where Social Security contributions stopped in 2012.

However, this "pay raise" did not benefit everyone equally.

Some federal employees were not eligible for the break because they did not pay Social Security tax, but rather paid into an older retirement system.

Here's how it worked: Social Security was a payroll tax deducted from every paycheck, amounting to 12.4 percent of a worker's total wages. Without the payroll tax cut companies and employees would split the cost evenly, meaning an individual paid 6.2 percent of his or her overall earnings into Social Security. Under the payroll tax cut rule an individual paid only 4.2 percent, while the employer continued to pay 6.2 percent.

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