Attention Americans: Your paychecks in 2013 are about to get smaller thanks to the Fiscal Cliff compromise deal that passed Congress on January 1, 2013.
Social Security taxes had been 6.2 percent of gross pay since 1990 and they remained at 6.2 percent until 2011 when Congress and President Obama agreed to temporarily reduce the tax from 6.2 percent to 4.2 percent as part of an economic stimulus package. The reduction in the tax rate shocked many and was the first time Social Security taxes had been reduced since 1968. The two percent reduction in tax wasn’t anything substantial, but it certainly made a difference for those scraping to get by and living from paycheck to paycheck.
Now, the honeymoon is over. The Social Security tax holiday is behind us and taxes are now back at their original 6.2 percent rate. This means that any American who pays Social Security taxes (i.e., almost every one of us) will witness a drop in net pay effective immediately.
Federal tax withholding was also adjusted to reflect the new 39.6 percent tax bracket, which replaces the 35 percent bracket. This new rate only affects individuals earning more than $400,000 per year, so it will not matter to the vast majority of Americans.
It is normal for Federal Tax tables to adjust slightly, for all tax brackets, at the beginning of each New Year to accommodate for higher costs of living. Net pay normally increases a little as a result, but the 2 percent increase in the Social Security tax rate will more than offset the reduction in federal income tax withholding, resulting in lower net pay for all.
Expect to see this tax increase immediately on January paychecks and expect it to continue for the remainder of the year.
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