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Guess what? Everyone just got a 2% cut in pay

Guess what? Everyone just got a 2% cut in pay

Congress acted just in time, literally, on the fiscal cliff. But that didn’t extend a 2% reduction in payroll tax.

NEW YORK (MainStreet) — Congress acted just in time, literally, in passing the American Taxpayer Relief Act of 2012. As a result, the Internal Revenue Service has been able to release updated income tax withholding tables for 2013 that will apply to the first paychecks issued in the New Year.

ATRA extended the various tax benefits that had expired Dec. 31 — with one exception. Noticeably missing from the legislation was an extension of the 2 percent reduction of the employee's share of Social Security Tax withholding and the corresponding reduction in the Self-Employment Tax. This 2 percent reduction in payroll tax withholding for 2011 and last year was the latest incarnation of George W. Bush's disastrous rebate checks.

So starting Jan. 1, everyone got a 2 percent cut in pay!

READ: Understanding payroll and withholding taxes

Beginning with the first paycheck of this year, the employee's share of the Social Security tax returns to 6.2 percent and will apply to wages of up to $113,700, the new maximum Social Security wage base. The Self-Employment Tax will return to 15.3 percent, with the Social Security component of 12.4 percent limited to $113,700 of combined maximum W-2 income and net earnings from self-employment.

The maximum Social Security wage base for 2012 was $110,100. So the maximum withholding for Social Security tax increases from $4,624.20 last year to $7,049.40 this year, an increase of 52.45 percent.

Also new for 2013 is the "Additional Medicare Tax" of 0.9 percent, a provision of the Patient Protection and Affordable Care Act (aka "Obamacare"). This applies to single employees earning more than $200,000 and married couples who earn more than $250,000. Employers are required to withhold the new tax on wages exceeding $200,000 for all workers, regardless of marital status. So for 2013 the employee Medicare tax rate, normally 1.45 percent, will rise to 2.35 percent on earnings in excess of $200,000. The Medicare Tax applies to all wages — there is no limit as there is with the Social Security tax.

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