It’s pretty amazing to me how many people truly still don’t understand our payroll tax system. When you work as a W-2 for an employer, both you and your employer are going to pay certain payroll taxes. The two main types of taxes are the Federal Insurance Contributions Act (FICA) tax and the Medicare tax. Both you and your employer pay 6.2% into FICA up to $113,700 this year and Medicare is a perpetuity tax at 1.45%. In 2013, when wages, compensation, etc. get above $200,000 for an individual and $250,000 for a married couple, you will incur an additional .9% Medicare tax this year. When your W-2 gets above $200,000, your payroll provider should be deducting that amount from your paycheck now, but it is important you double check at work.
Since there are many individuals who pay their full amount into social security and their income exceeds $113,700 in a particular calendar year, unfortunately your HR department won’t send you a notice that you now have an extra 6.2% in your paycheck for the rest of the year. This can happen early in the year for those who get large first quarter bonuses or make a big commission check, but for many of you it will happen toward the end of the year. Surely this money can be saved because you were able to make do without it from the beginning of the year until this point and time. Here are few ideas of what to do with your extra 6.2% in every paycheck.
- Max out your 401(k) if you haven’t already in 2013. For those under the age of 50, you can save up to $17,500 and if you turned 50 this year or are older than 50 you can save up to $23,000 this year.
- Pay down consumer debt. If you have any built up credit card debt or automobile loans, start making extra payments and clear out unnecessary nondeductible consumer debt.
- Make an extra payment on your mortgage. Doing this every year might actually cut 5 or more years off the shelf life of your 30 year mortgage.
- Add to your children’s college education accounts. Whether you have a 529 plan, UTMA/UGMA, or Education IRA, add some additional monies toward paying down future college costs.
- Set up a holiday fund. Open an account at your bank or credit union and deposit these extra monies so you don’t have credit card debt going into the New Year.
Thanks to our Your Smart Money Moves readers for bringing this topic to my attention. It’s a great way to save money that might otherwise slip through your fingers if you weren’t paying attention.
Request a FREE consultation: www.oxygenfinancial.net