In case you’ve missed it, the US Congress has passed a measure to partially avoid the ‘Fiscal Cliff’ and sent a bill to the President and all signs point to his signing it. One measure in the bill is the planned phase-out of the “Social Security Tax Break’.
Back in 2010, Congress passed the Social Security Tax Break that brought the employer portion of Social Security down to 4.2% of earnings from 6.2%. (The employer portion stayed at 6.2% for the duration.) The tax break was only meant to be for two years and was set to expire as of December 31, 2012.
The Congressional agreement did not reinstate the Social Security Tax Break so wage earners and the self-employed will go back to the 6.2% rate (paying in more to Social Security) starting January 1, 2013. Wage earners and the self-employed pay into Social Security for the first $113,700 of wages or self-employment earnings. The increase in withholding means a lower paycheck.
In Illinois (where I practice), the social security tax break was barely noticed by most people because the State of Illinois raised the personal tax rate on January 1, 2011 to 5% from 3%. I wrote at that time it was interesting that Illinois would raise rates by the same percentage that the Federal Government gave a break on. So, for the last two years, Illinois wage earners and the self-employed received no net benefit from the Social Security Tax Break. Now, we will have to deal with a ‘tax increase’ of 2% and it will come as a shock to a lot of people. There are plans to reduce the Illinois personal tax rate over the next few years, but considering the dire financial straights Illinois is in, I’m not banking on it.
How much is the increase in withholding? Basically, think of it as $500 for every $25,000 you earn. So, if you make $50k a year, that’s $1000 more in withholding; if you make $75k, then it is $1500 and at $100k, that is $2000. If you earn $113,700 or more, the additional amount paid into social security is $2274.
If you don’t pay into social security (a lot of government employees do not, and the same with some teachers/educators, retirees, etc.) you shouldn’t see any increase in withholding.
Get ready, my friends in Illinois – your paychecks are about to go down and you can honestly blame Illinois, not the federal government.
Feel free to send me your thoughts & comments.
Thomas C. Hodge, CPA
The Hodge Group
3040 N. Menard Avenue
Chicago, IL 60634