Payroll Taxes Broken Down
The tax on wages consists of two portions: the employer's share and the employee's share. These can each be further broken down into portions for Medicare, federal income tax withholding, and social security. The Medicare tax rate is 1.45% for each, the employee and the employer. The federal income withholding portion is the federal income tax withheld for the employee. This portion is considered to be held "in trust" for the employee and this is where the "Trust Fund Recovery Penalty" may be applied. (For more information about the Trust Fund Recovery Penalty, see The Dove Firm's website.)
The social security portion is where the tax increase comes into play. For 2012, the employee tax rate for social security is 4.2%. This was instituted in 2011 as a compromise for the discontinuance of the Making Work Pay credit. (The decrease in funding to the Social Security program for the past two years was reimbursed by the general fund of the Treasury.) The employer's portion for social security has remained at 6.2%. The social security tax is only paid on the first $110,100 for 2012.
This all means that, unless the payroll tax cut is extended in the fiscal cliff talks, taxpayers will see their paychecks decrease in 2013. By way of example, the total decrease will be about $1,000 per year for a salary of $50,000. On the other hand, it also means that the general fund will no longer be used to reimburse the Social Security program at a time when our country may not be able to afford it. There are only a few weeks left in 2012 for the lawmakers to come to a decision.