Whoops! Don’t believe everything you read. That is the lesson coming from the extension of the payroll tax cut. Congress has settled on a two month payroll tax cut extension and will revisit the issue in February. The administration has announced that this two month extension will save the average American family $1,000. Not so fast, Mr. President, you are only high by about $840. Let’s do the math.
It’s true that you would save that much if they had passed the original Boehner bill and extended the cut for a whole year. However, in order to get that sort of savings with just the two month extension, you would have to paid an average of $25,000 a month for January and February. The other option would be to frontload your salary and take as much as possible in January and February if that is at all an option.
For a family making $50,000 a year (spread out over 26 equal, bi-weekly pay periods) this comes to a savings of about $40 a paycheck. For business owners, you may want to consider saving a portion of that savings to pay your payroll service provider for having to switch rates and adjust their software midquarter.
Seriously, we anticipate the tax cut will come up again in February and will likely be extended again. Politics seems to be taking a higher priority than stable tax law.
What the extension means for you is that for January and February the Employee Social Security rate will remain at 4.2% and the Employer rate will remain at 6.2%. After February, unless the cut is extended again, the rates will go back to matching at 6.2%. That will be a return to 2010 Social Security tax rates. If you have any questions regarding the payroll calculations for your company or employees, please don’t hesitate to call.