Paychecks shrinking as new year begins

As employees begin receiving their first paychecks of the new year, many are finding their take-home pay is lower than it was just a few weeks ago. That’s because, as part of the compromise to avoid the “fiscal cliff,” Congress let the tax that funds Social Security benefits revert to 6.2%, up from 4.2% last year. “This is what they were talking about when they said the ‘fiscal cliff’ deal could cost the average American taxpayer $2,000,” explains Postlethwaite & Netterville CPA Bill Potter. “For someone making $70,000 a year, this is going to be another $1,400 coming out of their paycheck this year.” Because the fiscal cliff deal was made so late in 2012, the Internal Revenue Service released its income tax withholding tables to employers later than usual. That means while employers are encouraged to begin withholding more from their employees’ paychecks for Social Security benefits as soon as possible, they aren’t required to do so until Feb. 15. So even if you haven’t yet seen a decrease in your paycheck this year, rest assured you eventually will. Economists expect the lower take-home pay to hamper the U.S. economy in the year ahead. “That will translate into weaker spending. I expect the economy will spin its wheels for many months until the jobs picture, and associated incomes, improves,” says Bloomberg LP Senior Economist Richard Yamarone in a recent Bloomberg report about shrinking consumer confidence. —Steve Sanoski