Do You Have 6.2% Extra In Your Paycheck?

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.

Written by:

Ted Jenkin

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About the author  ⁄ Ted Jenkin @ Your Smart Money Moves

Ted Jenkin @ Your Smart Money Moves

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My friends and family all think I’m a workaholic, but I say I’m just a guy that loves to help people do better in life.

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Ever since I was a little kid, I always loved money and being an entrepreneur. In fact, I still have cassette tapes of me talking to my grandmother at the age of five and my mother tells me all the time how much I played with money as a kid...

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Ted Jenkin is a frequent guest columnist for the Wall Street Journal and Headline News Weekend Express. He is the co-CEO of oXYGen Financial. You can follow him on LinkedIn @ www.linkedin.com/in/theceoadvisor or on Twitter @tedjenkin.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. oXYGen Financial is not affiliated with Kestra IS or Kestra AS. Kestra IS and Kestra AS do not provide tax or legal advice.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor regarding your individual situation. 

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9 Comments

  • December 26, 2013

    Great tax advice. I believe people will get the best bang for their dollars by paying off any debt first then adding to the 401K.

  • Ted Jenkin @ Your Smart Money Moves
    January 1, 2014

    Debt is really what weights people down in life. As I have paid off all my debt, it is truly uplifting!