Ed Note: Sticker shock? You’re not alone. If you’re receiving your first paycheck of 2013 this week, you (like many Americans) might be surprised to see a number that’s a bit lower than the one you’re used to. We turned to Lynn Ebel of the Tax Institute at H&R Block for an explanation.
Why is my paycheck suddenly lower than usual? There must be some mistake!
No mistake. The end of the 2% payroll tax holiday at the end of 2012 made paychecks shrink beginning in 2013. All taxpayers who earn income subject to Social Security tax saw a 2 percentage point reduction on their paychecks. The paycheck you’re receiving this week reflects the first pay period of 2013 — which is why the number you see is lower than the one you’re used to.
For 2012, employees and self-employed individuals paid 2 percentage points less in Social Security tax. For 2013, however, Social Security withholding rates for employees and SE tax returned to the original levels of 6.2% and 12.4%, respectively, which was last applied in 2010.
Is there anything I should do?
This decreased take-home pay in 2013 was automatic for employees as Social Security rates increased 2% (back to the original 2010 levels of taxation). For example, workers earning $40,000 (average annual income) will see about $67 less in their monthly paychecks. Additionally, self-employed individuals will need to make quarterly payments using the combined Social Security and Medicare tax 15.3% in 2013.
If you receive a tax refund this year, you may want to think about saving it instead of spending it to meet your budgetary needs for the rest of the year.
Are there any other changes I need to watch out for on my paycheck as a result of the Fiscal Cliff deal?
Luckily as a result of the fiscal cliff deal, many popular tax breaks — such as the tuition and fees deduction, the mortgage insurance premium deduction, the $250 qualified educator adjustor adjustment, and the state and local sales tax deduction — have been extended through 2013. This means if you qualify to claim these tax benefits, you should evaluate your W-4 withholding and/or quarterly estimates to see if you can withhold less federal income taxes.
This would increase your take-home pay, but would reduce your federal tax refund for when you file your 2013 taxes (or may even increase the amount of taxes you will owe in 2013!) Many people who would receive a refund choose this option because they need the increase in take-home pay now, as opposed to when they file their taxes at tax time. However, this is not recommended if you will owe taxes when you file your 2013 return. Therefore, you may want to speak with a tax professional to estimate whether you think changes to form W4 is a good idea. Many life events, such as changes in marital status, having a child, sales of homes or stocks, and changes in earnings may affect your tax return significantly.