Payroll Tax Cut Set to Expire in 2013

Washington D.C.may be in the midst of big battles over spending, but both parties appear to have reached a consensus on one point: allowing the payroll tax cut to quietly expire at the end of 2012.  First enacted for the 2010 tax year, the payroll tax cut was put in place as a boost for workers, with the hope that the surplus income would bolster consumer spending by putting between $700 and $2,200 back into the worker’s pockets.

The employee portion of the payroll tax deducted from employee paychecks was temporarily reduced from 6.2% to 4.2%.  The employer portion remained at 6.2%.

As reported in the Wall Street Journal and on CNN Money, when the tax rises again in January 2013, it is estimated to contribute $95 billion per year to federal tax revenues.  Because the payroll tax reduction is just one of many tax cuts set to expire, there is some speculation that allowing it to return to the original rate is the lesser of many evils facing Congress.  Legislators are currently trapped between the need to generate tax revenue to lower the deficit and fears that allowing too many tax cuts to expire will throw the economy into another recession.

Surveys conducted in 2012 on individual’s use of the funds from the 2011 payroll tax cut found that only 35% spent the additional funds generated by the cut.  The remaining 65% used the additional cash to pay down debt or add to savings.  In that respect, the payroll tax may not have as great an impact on most employees’ monthly disposable income, but it will impact their ability to save or reduce debt, two important factors in financial stability.

How will the reinstatement of a 6.2% payroll tax impact your business?  As an Oasis client, you won’t need to worry about adjusting your payroll systems to make this change as it will be handled for you.  You should, however, take time to communicate to your employees in advance of the reinstatement, to allow them time to adjust their budgets and to prevent unpleasant surprises when they view their paychecks.

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