Many workers were anxious about the fiscal cliff deal before it even happened. Talks of lower paychecks had many worried about their financial future. Unfortunately, once the deal was made it did have a negative impact on over 160 million workers.
Although tax breaks for families in the middle income range were extended, the payroll tax cut was not. This payroll tax cut expired so many people still saw a decrease in their paychecks once 2013 rolled around.
The tax on a person’s paycheck went from 4.2% to 6.2%; a two percent increase. Those that make approximately $100,000 per year will lose about $2,000 to payroll taxes. Even those with less income are really seeing the difference. A worker that makes around $30,000 a year will lose around $300. This sets the disposable income of Americans back by almost $115 billion, which means an even weaker economy. This also creates stress for those with small businesses and could lead to cutbacks and less hiring throughout the rest of the year. While this isn’t a huge amount, workers are already noticing a difference. For those that live paycheck to paycheck, a $70 loss a month is huge. That $70 may have covered a bill that is a necessity. While this protects most people from an income tax increase, wage earners take a hit to their take home pay.
This comes out of the Social Security payroll tax. What it does is fund Social Security through the wages and is paid by both the wage earner and the business. Back in 2011, the amount was actually lowered to the 4.2% and this gave workers more income. Now that extra income has expired and many workers have not prepared for this decrease in their pay.
Small business owners are affected as well since many pay their taxes through an individual return. These types of businesses are over 50% of the workplace so many small businesses are affected such as S-Corps., partnerships, limited liability companies and sole proprietorships.
The fiscal cliff deal may help in the long run but those that need their money now are not seeing the benefits of this last minute deal.
Arnold Westlake is a retired banker and regular blogs about money management, MoneyMutual, personal loans, and taxes for numerous blogs and websites.