If you hadn’t noticed that 5 o’clock shadow looming over your shoulder, it’s the payroll tax cut that is set to expire beginning January 1st, 2013.   For the last 18 months, most of us have received a nice little holiday bonus from the U.S. Government.  We have all been paying only 4.2% into Social Security rather than the normal 6.2% into Social Security.   The Social Security wage base was $110,100 here in 2012 which meant that the upper end of tax payers got a roughly $2,200 pay raise.    The program was designed by this administration with the average wage earner in mind.   For someone earning $50,000 a year this tax break represented roughly $20 a week more in their paychecks.    And who noticed at the end of the day . . . nobody!

For those of you who don’t fully understand how Social Security gets funded, here is a quick math lesson.   In most tax years (the last couple not withstanding), Social Security is a 12.4% tax.   6.2%, or half of this number, is paid by your employer and the other 6.2% is paid by you, the employee.   The Government typically sets a cap adjusted for inflation each year as to the maximum allowable wages for paying the Social Security tax.   Medicare, on the other hand, is a perpetuity system and you and your employer pay the 1.45% no matter how much income you make as an American.   I won’t be surprised at some point if the Social Security taxes look more like perpetuity Medicare system on those making more than a certain amount of money.

As a small business owner, I have to make payroll every two weeks.   The payroll tax cut gave me no real break as an employer as I still paid the 6.2%.  This means there was no additional money in my pocket.   My employees got a 2% pay raise that was not of my choice nor did I have any control on what happened with that money.   Do you think most employees that got this artificial raise saved it in their retirement plan?   Of course not.  In fact, my guess is that if you surveyed 10 people making less than $75,000 of household income most of them at this point have completely forgot the free income they got from the Government.    Since 18 months have passed since this free money was placed into employees paychecks, how many of them do you think have become addicted to the 2% drug?

So, who will the real loser be in the grand scheme of things when either Obama or Romney idly watch this tax cut expire and we go back to 6.2% payroll tax out of each employees paycheck beginning in January?   It will be the small business community, because you can be 100% certain that when employees see their paychecks go down they will immediately complain to their employer that they need more money to meet their bills.    Will the Government then come to the rescue the small business owner?    We will be the ones left behind to help people make ends meet when the free Government cheese is no longer on the shelf.

With 163 million people affected by this come January 1, 2013, not all of those employees are employed by business owners.  Big business won’t skip a beat with this change as a few employees leaving their company won’t be more than a mere rounding error.  For a local small business owner, potentially losing that one or two key employees over a few thousands bucks will make for some tough decisions come January.    When we will learn that handouts just don’t work?   If we train employees in this great country of ours that we will just keep on giving our FREE Coke Refills than soon the next conversation gets to the size of the cup.  It must be nice to be able to click a button and print out Monopoly money ay the Government level.  For the rest of the mere mortals it’s just one more line item we will all have to consider in our budgets for 2013.

Visit oXYGenFinancial.net to request a consultation on how to make smart money moves for your future.

Written by:

Ted Jenkin, CFP®, AAMS®, AWMA®, CRPC®, CMFC®, CRPS®

Co-CEO and Founder of oXYGen Financial, Inc - The Leaders in Gen X & Y Financial Advice and Services

Ted Jenkin  is one of the foremost knowledgeable professionals in giving financial advice to the X and Y Generation.

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