Town and Country Newspaper

Business News Article

Fatter Paychecks? Many Are Clueless

2012-03-29

The payroll tax reduction has been extended under the Middle Class Tax Relief and Job Creation Act of 2012. Two percent of your deduction for Social Security (4.2 percent, down from 6.2 percent) has been picked up by the government again, and that amount will stay in your paycheck. If you’re self-employed, your portion of self-employment tax drops from 12.4 percent to 10.4 percent, to account for that 2 percent.

Workers who earn $50,000 would have seen $1,000 in their paychecks over the year the reduction has been in place. Divided by 24 (assuming twice-monthly pay periods) and that would have come to around $40 per paycheck. If your annual pay is $30,000, your savings from the reduction is $50 per month.

Oddly enough, a poll by the National Foundation for Credit Counseling showed that 66 percent of workers didn’t know their paychecks were larger, even though the extra amount had been in paychecks for a year.

The poll shows what the rest of polled workers did with that money:

--Saved most of it: 3 percent

--Caught up on past-due bills: 8 percent

--Increased retirement contributions: 4 percent

--Bought something special: 1 percent

--Paid off debt: 18 percent

NFCC believes that the extension gives companies a chance to educate employees about using that money. For example, they believe that workers who aren’t distracted by financial concerns perform better and don’t receive collection calls at work.

It’s believed that the government would like us to spend the “windfall” as a means of boosting the economy. However, you are the one who needs to decide how best to use that money.

First, be aware of the additional amount in your paycheck. If the reduction isn’t further extended next year, that amount could vanish from your income. Use a calculator online to learn just what extra amount is included in your check.

Second, determine what gets you the most return for that money. For example, if you put the money in savings, you’ll likely earn less than 1 percent interest. If you use the money to pay off a credit card (adding the additional money to every month’s payment), you’ll save the interest you would have paid on the balance.

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