Payroll Tax Cut

The payroll tax cut is a 2 percent decrease in payroll taxes during the year 2011 and the first two month's of 2012 for workers who pay into Social Security. It means a bigger paycheck for most workers during that period. Whether Congress will extend the payroll tax cut for another year is still not certain.

A congressional conference committee charged with resolving the impasse over the payroll tax cut will meet on January 24th, 2012. The biggest hurdle for the panel will be how to cover the estimated $100 billion cost of a full year extension. According to Bloomberg Democrats want to pay for the bill by imposing a surtax on income over $1 million, while Republicans want to freeze pay for government workers.

The New York Times estimated that the payroll tax cut amounts savings up to $1,000 annually for a family earning $50,000 a year.

A family earning $70,000 sees $1,400 more in their paychecks. According to CNN that's $600 more than the Making Work Pay credit that expired at the end of 2010.

The payroll tax cut rule gives people with higher salaries a bigger monthly increase. The tax cut only applies to the first $106,800 earned, because that's where Social Security contributions stop.

For a worker slated to pay the maximum tax, $6,621.60 on income of $106,800 or more in 2011, the cut means a saving of $2,136.

However, this one-year "pay raise" does not benefit everyone equally.

Some federal employees are not eligible for the break because they do not pay Social Security tax, but rather pay into an older retirement system.

Here's how it works: Social Security is a payroll tax deducted from every paycheck, amounting to 12.4 percent of a worker's total wages. Without the payroll tax cut companies and employees would split the cost evenly, meaning an individual paid 6.2 percent of his or her overall earnings into Social Security. Under the payroll tax cut rule an individual pays only 4.2 percent, while the employer continues to pay 6.2 percent.