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Payroll Tax Holiday on the Way Out?

Written by Nickel - 19 Comments

Not quite a year ago, when Congress was extending the Bush-era tax cuts, they also enacted a “Payroll Tax Holiday.” In short, this meant that your FICA taxes would be reduced by 2%.

For those that are unaware, your FICA taxes total (on the employee side) 7.65% of your gross compensation, with 6.2% going toward Social Security and 1.45% going toward Medicare. Once the “holiday” kicked in, the Social Security portion was temporarily reduced to 4.2%.

The Social Security portion of this tax, referred to in your pay stub as FICA-OASDI, applies to your first $106,800 in earned income. After that, the Social Security tax drops off, but the Medicare tax remains in place. Given this, the Payroll Tax Holiday is worth up to $2136/year (that’s 2% of $106,800).

With that said… It’s worth noting that this tax break is currently on the chopping block as part of the deficit reduction talks. In truth, this was only a one year break, but once tax cuts are enacted it’s politically difficult to get rid of them, so I fully expected this to continue into the future. Looks like that may not be the case.

What do you think? Should we ditch the Payroll Tax Holiday at the risk of further under-funding our Social Security obligations? Or leave it in place in hopes of spurring consumer spending, and helping to get the economy back on track.

AP via Bargaineering

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Published on August 24th, 2011
Modified on September 5th, 2011 - 19 Comments
Filed under: Taxes

About the author: Nickel is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!

19 Responses to “Payroll Tax Holiday on the Way Out?”

1
BG Says:
August 24th, 2011 at 3:23 pm
My vote: kill this tax break, and while you are at it, end all the original ‘Bush’ tax cuts of the last 10 years. Not just the ‘rich’ guys tax cuts (as Obama/Dems want), but do it for everyone. We need to go back (at least to) Clinton-era tax rates since every tax cut since then has been funded by borrowing the money. That is why the federal debt is so massive.

Once we raise the tax rates (for everyone) back to the Clinton-era levels, increase them some more so we can start funding the 2-3 wars we are in.
2
Paul Williams Says:
August 24th, 2011 at 6:51 pm
This is a no-brainer. It should be on the chopping block! The whole thing was a dumb idea to begin with. It wasn’t supposed to hurt Social Security funding because the cut would be replaced from income tax revenues and we know how well those are going…
3
stannius Says:
August 24th, 2011 at 7:23 pm
Given all the noise about the trouble social security in, I am honestly flabbergasted that the cut went through at all. Not only should the cut be allowed to expire, but the cap should be removed. We really need to raise taxes in this country and stop trying to borrow our way into prosperity.
4
Crystal @ Master Your Card Says:
August 24th, 2011 at 11:24 pm
I wouldn’t mind seeing it cut. I think it’s silly to think that we can get out of debt without taxes going up.
5
Travis @Debtchronicles Says:
August 24th, 2011 at 11:50 pm
I respectfully disagree with the other comments. We need to put more money in the pockets of Americans and cut spending. What will happen to the economy if we take money away from already struggling Americans?
6
Clark Says:
August 25th, 2011 at 12:19 am
For my part, I was all too happy to pay less in FICA this year, but I have to say it makes no sense to continue this ‘holiday’. It wasn’t very stimulative and only hurt our public finances.

And while we are allowing this holiday to expire, lets throw in a little tax equity while we’re at it.

My question is why do people like me who make most of their money through wages pay FICA AND standard income tax rates, when people who make their money from capital gains get to pay a special lower tax rate and no FICA? This is patently unfair. All personal income should be subject to the same taxes regardless of how it was earned.

As for social security, let’s not kid ourselves, it is a transfer payment, not a pension. It is funded as a pay as you go system. There is no ‘lockbox’. The social security trust fund is just a claim on future tax revenues. And your benefit is and always will be dependent on the federal government’s ability to pay. We should means test social security beneficiaries and acknowledge the true nature of the program.
7
Kathy F Says:
August 25th, 2011 at 12:29 am
The struggling Americans are those without jobs at all. With all the talk about Social Security being underfunded for providing the benefits for present and future recipients, cutting the amount contributed by present wage earners does not make sense. Also, I am one of those who don’t pay SS on the amount of my income above $106,000. (I make about $115+ K)

So then I get a 2% cut on the amount I make up to $106K?. For what? This doesn’t seem to make sense. I don’t go out and spend that extra 2%. I just stick it in my savings account and try to earn my measly 1% interest on it. So much for stimulating the economy. They should repeal this SS tax break and increase the amount of income subject to SS tax.
8
Scott Says:
August 25th, 2011 at 2:18 am
So it sounds like many of the people here, who obviously take a great deal of interest in their own personal finance think that the government knows better how to spend that money than you do?

Does the Government know your plans for the future? How you value housing as compared to education, or savings, or vacation? Someone in Washington knows better how to spend the money you worked hard to earn all year?

It shocks me how people who are uniquely interested in learning how to manage their own money wisely can so freely let that money be taken by the government and spent in a way so disassociated from your own hard-learned wisdom.
9
Darwin's Money Says:
August 25th, 2011 at 8:12 am
I realize the economy’s dragging, but they’ve tried everything and nothing seems to be working. We may need to resort to changing tax structure, regulations and some other methods to spur investment/growth instead of continuing to take on more debt. It was meant to be 6.2%, it should remain 6.2%. We’re borrowing today to have to pay back tomorrow, with no real sincerity in ever paying it back.
10
BG Says:
August 25th, 2011 at 8:35 am
Scott, I agree. The first spending cuts that need to be done is the spending related to 2-3 unfunded wars and the unfunded tax breaks of the past ten years.

Spending and taxes are just two different sides of the same coin.
11
Daniel Says:
August 25th, 2011 at 9:32 am
I think the tax break needs to be axed. $10-20 per paycheck (for most people) is not going to stimulate the economy. Of course, most of the people reading this probably have strong fiscal convictions, but I agree, we need to balance the budget. I think we should be raising taxes (across the board, but even more for the wealthier). And we have military largesse that needs to be trimmed.
12
Kev Says:
August 25th, 2011 at 10:41 am
It needs to go. I thought it was a horrible idea to begin with and I doubt it had the impact they were hoping for.

At this point, I think one of the best things they can do is let interest rates start to rise. Keeping rates on the ground hasn’t done anything for us – companies are hoarding cash and consumers simply aren’t buying enough. A temporary measure that throws a few extra bucks on my paycheck – one that I fully expected to expire at the end of the year – doesn’t make me want to go out on a spending spree. On the other hand, if my savings accounts, CDs, etc. started paying what they did a few years ago then I may feel a little better about easing the purse strings.

Spenders aren’t getting us out of this mess. Maybe the savers can.
13
Ginger Says:
August 25th, 2011 at 10:59 am
I was expecting it to expire at the end this year and I hope it does. We can’t afford not to pay into social security/medicare. In fact, I would support removing the cap on the income available to be taxed by FICA.
14
Kevin R. Says:
August 25th, 2011 at 11:11 am
Tax cuts are just as Keynesian as stimulus packages. I tend to not favor Keynes (though I suppose an argument could be made that John Maynard Keynes was thinking his ideas would be short term and not decades long as we’ve practiced them). We should be tax at the rate which is needed to fund the government and we should spend what the revenue brings in, only go into deficit in truly extraordinary situations. If we actually paid for our social services and our wars, then maybe electorate be more involved in saying what we really want.
15
BG Says:
August 25th, 2011 at 12:52 pm
Kevin, I couldn’t agree more. I think we need a balanced budget amendment that gives final authority to the IRS to increase tax rates across the board to make up any yearly shortfalls in revenue.

Congress passed the spending bills, they should not be allowed (any longer) to get away without funding their spending. As it is now, our tax rates have no correlation to our spending, which the $14 trillion (and growing) federal debt proves.

Once the citizens start paying the true amount in taxes that is needed to fund our spending, they will scream at Congress to cut spending — then we can start to have balance.
16
JW Says:
August 26th, 2011 at 2:31 am
The payroll tax cut should stay in place as long as Social Security collects enough money with the cut in place (which is the case right now). Any SS surplus is spent by the Federal Government instead of being held within the SS program. The Treasury department (Sec Geithner) claims it sends out 80 million checks a month… that is 25% of our population… TOO MANY CHECKS! Reducing spending from current levels is necessary.

Tax reform is necessary but there isn’t any evidence of leadership in place in our Federal Government. Why is the debate on tax rates limited to income tax? Why not some discussion about tax brackets for capital gains since a consequence of lowering the cap gains rates in the 1990’s is that a lot more income is classified in that manner. (Though there was an increase across the board for cap gains in the ObamaCare law enacted last year)
17
Devin Says:
August 27th, 2011 at 3:50 pm
Funny that the only tax increase the Right supports is on working people. I have been voting Republican but no more.
18
T. Fadley Says:
December 8th, 2011 at 2:58 am
We don’t need more taxes. We need less spending. The whole system needs to be reformed from the ridiculously complicated tax code to the ridiculous amount of very wasteful Govt. over-spending. The fact is that the many pressure groups own most of the politicians at all levels of govt.
19
Jim Says:
December 12th, 2011 at 11:00 am
We need to go to one consumption tax that covers taxes at all levels of government and it should be a fixed % (say 30%) on all items used to calculate GDP. The government would have to help increase GDP to get more money for the government. Those that consume a lot will pay a lot as it should be. Those that spend a little pay little but something.

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