By Amy Feldman
NEW YORK Feb 13 The payroll tax cut quietly
expired at the end of 2012, and for many American families who
are struggling to keep pace in a tight economy, that has raised
questions of what to do.
The tax, which covers Social Security, is deducted from your
paycheck automatically. It is based on your income, up to a
maximum of $113,700 for 2013. Income above that amount is exempt
from Social Security taxes. A tax cut to stimulate the economy
shaved 2 percentage points off the payroll tax, but now it has
been restored to 6.2 percent.
As a result, you will owe as much as $2,274 in taxes this
year that you did not have to pay in 2012.
"You have to put it into perspective: It's (a maximum of)
around $40 a week," said Robert Pesce, a partner at accounting
firm Marcum LLP in New York City. "That is real money, but I
don't know that it warrants panic."
From a tax perspective, the answer is, you can't do much.
"You can't opt out of it, and your employer can't reduce it,"
said Tim Speiss, a partner at accounting firm EisnerAmper and
head of the personal wealth advisers group.
But from a budgeting perspective, if you need the cash,
there are things you can do. Here is how to think about your
CONSIDER CHANGING WITHHOLDINGS
Changing your withholdings will not change the payroll tax
you owe, but it may help smooth out your tax burden for the
year. The Internal Revenue Service's online withholding
calculator (once it's up and running for 2013 it will be
available at ) can help you come up with the right number. To change your
withholdings, you would file a new Form W-4 with your employer.
If you make $100,000, for example, you will owe $6,200 for
Social Security taxes and $1,450 for Medicare taxes, regardless
of what you do with your withholdings. At that income level,
each additional allowance you take means, very roughly, more
than $1,000 more annually in your paycheck - $20 a week - due to
lower federal, state and local income taxes withheld.
Be careful if you go this route. Your final tax bill in 2013
depends on your unique financial situation (whether you itemize
or take the standard deduction, for example) as well as whether
you are affected by the year-end tax changes (such as the new
3.8 percent Medicare surcharge).
If you always get a big refund at tax time - as many
taxpayers do - changing your withholdings may be a good way to
keep money in your pocket now rather than loaning it to the IRS.
For instance, if you got more than $1,000 back last year, and
adding one allowance would mean roughly $1,000 back in your
paycheck, you could access that money now instead of later.
Depending on other changes in your financial and tax picture,
however, it is unlikely to shake out quite that neatly.
If you already owe tax in April or received only a small
refund last year, however, Pesce warns that he would not advise
changing withholdings to add to your paycheck. After all, come
tax time, you would have to come up with the extra cash.
"You're just postponing the problem for later," Pesce said.
"In my experience, dealing with the problems in the moment is
better than later on. They get worse later on."
DON'T CUT YOUR 401(k)
You may be tempted to cut your contribution to your
retirement accounts to goose up your paycheck to cover that 40
bucks a week, but it is not generally a smart move. Most
Americans are already under-saving for retirement, and trimming
what you put in now will have a much bigger impact down the road
due to the power of compounding. That is especially true if you
receive a matching contribution from your employer and wind up
leaving it on the table - essentially walking away from free
If you make $100,000, for example, and were putting aside 6
percent in your 401(k) - and your employer was matching at 50
percent up to that level - that's $9,000 going toward
retirement. Cut that savings to 5 percent, and the amount going
to retirement falls to $7,500 - or $1,000 less that you would
have put in and $500 less from your employer.
Yet you will not see anywhere close to that $1,500 in your
paycheck since part of it was from the match and part of it
disappears as you lose the tax benefit of saving for retirement.
"Bite the bullet and fund the 401(k) plan," Speiss said.
"You've got to figure out a way to make it work."
RECALCULATE ESTIMATED TAX PAYMENTS
If you are self-employed and owe estimated taxes, the
payroll tax cut's expiration means that you will owe more in tax
this year than last, too. To figure out how much, you will need
to re-do your estimated tax calculations before making your
first quarter payment in April.
The simplest (and most financially conservative) thing:
calculate the extra 2 percent you will owe this year, divide it
by four, and add that number - an extra $569, if your income is
above the Social Security cutoff - to your quarterly estimated
Whether you would rather pay that now or later is up to you.
Because of the way the so-called safe harbor rules work, as
long as you pay 90 percent of the total tax you owe this year,
or 100 percent of what you paid last, you generally will not owe
TAP DISCRETIONARY INCOME
Ask yourself if you really need the money lost to the
payroll tax for living expenses. If the answer is yes, look at
your discretionary spending. Can you cut your expenses by eating
out less, or by not buying so many cups of coffee during the
work day? More important, is your credit card debt weighed down
by high fees that you would be better off trying to lower?