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Fiscal Cliff Ahead: The Party's Over for the Payroll Tax Holiday

Payroll tax cutA month ago, we mapped out the fiscal cliff America is hurtling toward, and the torturous trail of automatic budget cuts and unhindered tax increases that could send the economy screaming into the abyss.

Pundits and analysts have largely focused their attention on the big-ticket items: the expiring Bush tax cuts that will add to tax burdens across the economic spectrum, and the automatic budget cuts that will disembowel most government programs.

But while these problems will be more vexing in the longer term, their immediate impact pales beside the expiration of the payroll tax holiday, which will also occur on Jan. 1. For most working families, the expiration of this benefit will cause an immediate, significant cut in their spending, which will rapidly slice into the revenues of the companies that rely on their consumer patronage.

A Hard Hit to the Middle Class

Initiated in 2010, the payroll tax holiday was designed to goose the economy by giving workers a quick influx of cash. The 2% cut in employee contributions to Social Security immediately put money into the pockets of working families. For a household making the national average of $50,000 a year, it translated into a $1,000 tax cut -- or about $20 more per week.

Unlike most of the fiscal cliff changes, which will affect people across the economic spectrum, the payroll tax holiday will primarily hit middle class families, because it was so precisely targeted to help them. Relatively speaking, it doesn't benefit wealthy households much, since Social Security taxes are only taken out of earnings up to $110,000.

Nor was the payroll tax holiday all that great for working families at the lower end of the income spectrum. It superseded the Making Work Pay Credit, which gave a lump sum of up to $400 to individual taxpayers. Most individuals making less than $20,000 and households making less than $40,000 actually got a marginally smaller tax break with the payroll tax holiday.

The result that the payroll tax holiday was most generous to the middle class was no coincidence. As many analysts have noted, a strong middle class is vital for a robust economy. The reason is simple: When households on the upper end of the economic spectrum get more money in their paychecks, they are more likely to invest it. The middle class, on the other hand, is more likely to spend that extra cash on goods and services. As middle class households pour more money into the economy, companies hire more employees to create and sell goods and services, creating a virtuous cycle of economic growth.

Virtue aside, the payroll tax holiday has become somewhat controversial. Earlier this summer, some Senate Democrats suggested that the benefit should be allowed to expire, due to the long-term threat it poses to the solvency of the Social Security Trust Fund. However, given the tepid pace of the economic recovery, many were loath to let the holiday end. In fact, House Republicans voted in February to extend the payroll tax holiday until the end of the year -- despite their hard-line approach on most tax breaks targeted at the middle class. Then again, in an election year, no party wants to be labelled as the Grinches who voted to increase taxes on 160 million struggling middle-class workers.

That is why -- brinksmanship aside -- the payroll tax holiday may well be renewed before January. Right now, both Democratic and Republican lawmakers seem inclined to allow the nation to slide closer to the fiscal cliff, as both sides hope the results of November's election will put them in a better position to get their spending and tax priorities passed afterward. But regardless, any party that forces struggling families to make do without that extra $20 a week will have a lot of explaining to do.

Bruce Watson is a senior features writer for DailyFinance. You can reach him by e-mail at bruce.watson@teamaol.com, or follow him on Twitter at @bruce1971.

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Right now, both Democratic and Republican lawmakers seem inclined to allow the nation to slide closer to the fiscal cliff, as both sides hope the results of November's election will put them in a better position to get their spending and tax priorities passed afterward.

GOP leader's top goal: Make Obama 1-term president msnbc.com news services 11/4/2010
Two days after Republicans scored big victories in congressional elections, Senate Minority Leader Mitch McConnell; The Senate's Republican leader, has a simple post election message for President Barack Obama: Move toward the GOP or get no help from its lawmakers.

So when we reach the cliff who should we push over first? Maybe if Obama offers the spoiled brats a lollipop, they will do what they are collecting a paycheck to do.

September 07 2012 at 12:48 AM Report abuse rate up rate down Reply

The payroll tax cut never should have happened, social security has enough problems already!!!

September 06 2012 at 10:26 PM Report abuse -1 rate up rate down Reply

i hate politics but some comments iread welfare,food stamps, cycle of welfare etc. why are republicans against abortion?

September 06 2012 at 10:04 PM Report abuse -2 rate up rate down Reply

People now adays do not want to work. And why should they,,,,unemployment for 99 weeks, medicaid, food stamps, which have been sold to stores for quick cash, and my favorite, the disibilty claims that are rolling in. Stump your toe on the sidewalk and you're set for life

September 06 2012 at 8:15 PM Report abuse +1 rate up rate down Reply

The payroll tax holiday was a joke anyway. obama used that to get votes. We need to add to social security, not take away from it

September 06 2012 at 8:13 PM Report abuse +3 rate up rate down Reply
2 replies to jwm347's comment

Then don't vote for Romney.

September 06 2012 at 8:43 PM Report abuse -6 rate up rate down Reply

Ahh- Bush tax cuts, in place before Obama took office

September 07 2012 at 12:22 AM Report abuse -1 rate up rate down Reply

"Like the old saying goes you can lead a horse to water but cant make them drink."
Same goes for the generations of leaches that have been living off of the tax payers backs, you can find them a job but can't make them work.
Hard working people have had to make sacrifices in their spending and comforts. Cutting back on the food they eat as well as getting a second job to make ends meet.
Yet these people on welfare continue to pump out kids, have free housing, free food, free medical care,free housing, free schooling for their kids,free schooling for themselves, nice cool houses thanks to the freeA/C.
Then we have a few who do work a week or two out of the year, they pay $500.00 in taxes and receive $7000.00 in their tax returns because they have kids..
Just more dead beats living off of the tax payers backs. Whether you like it or not they come into your home every day and take money out of your wallet to live off of.

September 06 2012 at 6:10 PM Report abuse +5 rate up rate down Reply
2 replies to ragtopdaz's comment
Brek Randolph

I agree with you rag. It appears your problem is you are trying to 'play by the rules.' You have to do like many others and learn how to game the system. Structure your affairs so you qualify for benefits. Or don't per say game the system just drop out of the income tax fraud. You will need cash monies. The problem today is not that the government is corrupt, the problem is everyone knows it is corrupt.

September 06 2012 at 8:56 PM Report abuse +1 rate up rate down Reply

I would guess that you then believe Government sponsored medical care should allow and pay for abortions, which would allow those on wealfare to stop pumping out kids and in the long run save money. So you won't be voting the Republican ticket.

September 07 2012 at 12:29 AM Report abuse rate up rate down Reply

End the cut and fully fund social security. Stop the democrat theft of social security revenue.

September 06 2012 at 6:04 PM Report abuse +2 rate up rate down Reply
1 reply to rab9's comment

The other little thing not pointed out by the author is that you will pay additional INCOME TAXES on that "extra" 2% you took home while defunding Social Security.

September 06 2012 at 7:16 PM Report abuse +3 rate up rate down Reply

This is 2% in social security tax that the individual didn't pay! Employers had to pay their full ss tax on employee's! The Federal Government under Obama took all your tax money owed! They didn't cut your Federal
Tax owed by 2% which would have been a tax holiday! Democrat (Rat) Math!

September 06 2012 at 6:01 PM Report abuse +2 rate up rate down Reply
1 reply to basscat58's comment

You are correct the Democrats did not cut Federal taxes owed as stated in the article it is a part of Bush tax cuts. Obama nor the Democrats drafted the cuts.

September 07 2012 at 12:38 AM Report abuse -1 rate up rate down Reply

I was eating lunch on the 20th of February with my 10-year-old neighbor kid
and I asked him, "What day is tomorrow?"

He said "It's President's Day!"

He is a smart kid.

I asked "What does President's Day mean?"
I was waiting for something about Washington or Lincoln ... etc.

He replied, "President's Day is when President Obama steps out of the
White House, and if he sees his shadow we have one more year of

September 06 2012 at 5:55 PM Report abuse +4 rate up rate down Reply

Maybe I am the stupid one, but this is not a payroll tax cut. This is a cut in how much we pay into Social Security which is going broke. Wages on more than $110,000 are not taxed.Income from other sources are not taxed.This is the first time this has ever been done. It just appears to me if people expect to draw Social Security at some point then we need to raise the money to do so. So why would you do this? Payroll taxes are based on a percentage of income and we have tax rates for this. So could someone please tell me how not paying $20 more per week into the Social Security Fund is helping anyone.? Rasie the limit from $110,000 to $500,000 and then you will accomplish something.

September 06 2012 at 5:33 PM Report abuse +3 rate up rate down Reply