Payroll Tax Hike to Hit Consumers

Americans for Tax Reform President Grover Norquist (R) talks with Politico Chief White House Correspondent Mike Allen (L) during the Politico Playbook Breakfast at the Newseum in Washington on Nov 28, 2012. (Jim Watson/AFP/Getty Images)

A lot of self-congratulatory back-patting occurred after Congress and President Obama reached a deal to avoid the so-called fiscal cliff. Despite the good news, millions of Americans still stand to receive smaller paychecks starting this month.

While the federal income tax rate remained the same for those making less than $400,000 per year, a less-touted tax cut nevertheless expired on all tax brackets.

The Social Security payroll tax jumped from 4.2 percent to 6.2 percent starting this year, and taxpayers of all income levels are on the hook. The 4.2 percent was a lowered rate enacted two years ago to help stimulate the U.S. economic recovery.

This hike in the workers’ portion of the payroll tax will be felt by all earners. “For the average American family with a household income of $50,000, the payroll tax hikes could mean the loss of about a thousand dollars a year,” said Etta Money, president of InCharge Debt Solutions. “That kind of income loss requires some planning early in 2013 in order to cut expenses or increase earnings.”

In fact, the wealthy will be less impacted by the change, as the Social Security payroll tax applies to only the first $113,700 of annual earnings. So for any wages above that amount, no increase will be felt.

The effect of this was already felt in last month’s consumer confidence. While consumer confidence reached a five-year peak in November 2012, it declined in December partially due to the high unemployment rate, as well as the inevitable tax hike this year.

Economists surveyed by Reuters estimated that household income will decline by around $125 billion in 2013 due to a higher payroll tax. How that decrease in spending power will be hotly contested and carefully watched, as consumer spending makes up more than 50 percent of the U.S. GDP.

In addition, a new additional Medicare tax of 0.9 percent was implemented for individuals earnings $200,000 or more per year. This new tax also went into effect as of Jan. 1.

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