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Tom Murse

Why Your Paycheck Will Still Be Smaller Despite the Fiscal Cliff Deal

By January 2, 2013

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Barack ObamaFor all the self-congratulating and backslapping taking place in Washington over the agreement sidestepping automatic spending cuts and tax increases known as the fiscal cliff, middle-class American workers will still see their paychecks shrink in 2013.

In particular, the payroll-tax holiday that put thousands of dollars back into the pockets of workers in 2011 and 2012 wasn't extended as part of the deal to temporarily avoid the sequestration cuts and wide-scale tax hikes.

So what does that mean for you?

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It means that employers will begin withholding 6.2 percent of your paychecks on the first $113,700 of earnings, up from the 4.2 percent they withheld under the 2010 Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act.

The expiration of the law means American workers will see their paychecks shrink by hundreds, perhaps thousands, of dollars depending on their income level. According to the nonpartisan Tax Policy Center, workers earning less than $100,000 this year will see their after-tax income fall by at least 1 percent and as much as 1.6 percent.

A worker earning $35,000, for example, can expect to bring home about $700 less this year, or $58 a month, according to a Wall Street Journal analysis. A worker earning $45,000 can expect to bring home $900 less in 2013, or about $75 a month. Workers earning $75,000  can expect to bring home about $1,500 less this year, or $125 a month.

Still, President Barack Obama praised the deal worked out with members of Congress.

"Leaders from both parties in the Senate came together to reach an agreement that passed with overwhelming bipartisan support today that protects 98 percent of Americans and 97 percent of small business owners from a middle class tax hike," Obama said.

And yet the expiration of the payroll tax holiday will have an impact on some 160 million workers, a large portion of them who belong to the middle class.

As Dave Jamieson of the Huffington Post pointed out, the additional payroll taxes will wipe out modest pay hikes expected by some of the poorest workers in states where the minimum wage is increasing. In other words, a worker making $15,000 a year will be earning about $300 more in 2013 if he works in one of the states that boosted the minimum wage. But that same worker will also pay about $300 more in payroll taxes.

The payroll tax finances Social Security. Workers pay 6.2 percent of their earnings up to $113,700, and employers match it.

The expiration of the payroll tax holiday clearly will have an impact on workers and families, but it will also have an impact on the economy.

Joel Naroff, president of Naroff Economic Advisors, told The Associated Press: "It hits people whether they're making $10,000 or they're making $2 million." Mark Zandi, the chief economist at Moody's Analytics, told the wire service that the higher payroll tax will reduce economic growth by 0.6 percentage points in 2013.

So let's cut through the partisanship and the rhetoric coming from Washington: Middle-class Americans will indeed see their taxes go up this year, and in turn have less in their pockets to spend, or save.

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[President Barack Obama / Getty Images News]

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April 23, 2013 at 6:55 pm
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