I’m not rich, why is my paycheck smaller?

As January pay cycles invoke, many Americans wondering similar things: 

  • I thought the Fiscal Cliff was averted
  • I thought Obama promised not to raise taxes on the middle class (what is the middle class?)
  • What are these Obama Tax Increases
  • I thought the Bush era Tax Breaks were being extended
  • WHY is my paycheck smaller?

I’ll eschew the political discussion and cut to the chase.  Your paycheck is probably smaller this January for some of the same reasons my paycheck is smaller.  Some of these are political and some probably occur every year sans the year end Congressional Showdown.
Let’s start with some of the items that may or may not have impacted you:

• 2013 Benefit Elections, including Flexible Spending accounts:  This may be the most obvious but may also be an easy one to overlook.  Every company is different, but probably in a September/October timeframe you selected your Health Benefits for the New Year.  Even if you selected the same benefits, in some cases defaulting by not selecting, the costs of those benefits have likely increased and this will have a direct impact to your paycheck.  Flexible spending accounts fall in this domain too.  Perhaps you increased your contributions or perhaps the contribution process changed.  You may be withholding over a shorter timeframe which would increase the per-period contribution.

• W-4 Withholdings for State or Federal:  Did you adjust your withholdings in the new year based on a surprise tax bill in April or October (if you filed and extension)?  This is something we may have done several months ago that is just now taking effect.

 401(k) Contributions:  A couple things could happen here.  Perhaps you committed yourself to saving for retirement in the New Year by increasing your scheduled withholding percent.  Perhaps you maxed your 2012 contributions prior to year end so getting back into the habit on contributing is coming with a shock.  Or perhaps the increased contribution limits for 2013 are impacting your per period withholding.  2013 contributions have increased from $17,000 to $17,500 for both Traditional and Roth plans.  Each of these is worth looking into.

We started with some easy ones that may have been self-imposed.  I did that on purpose.  When faced with challenging news we should train ourselves to look first at ourselves.  What did I do or could I have done?  What can I do moving forward?  With regard to our income and desire to save, perhaps we did future date behaviors or the costs of some benefits did increase with the New Year.  I found both of these to be true in my case.
But it is also true that now all answers lay within, so here’s the one that’s probably part of the answer to your paycheck questions.  This one impacted most working Americans, myself included.

 Social Security/FICA Tax Increases took effect:  Generally we all pay into Social Security so we’re all impacted on this front.  One might argue that this was not a tax increase as such, but rather the expiration of a short term tax reduction.  I’ll let the politicos argue the nuances, while I recalculate my budgets to account for the increased governmental vig.

In 2011-12 the standard 6.2% Social Security tax rate was reduced to 4.2%.  This tax holiday expired in the New Year which caused a 2% jump in our tax bill.  The Wage Base (income subject to this tax) increased as well which combines to produce an increased liability of $2425.20, or roughly $200 per month.  (See chart) 

2013 Social Security Tax Rates

How much Social Security Tax is withheld?

 

 Finally, perhaps you are “rich”, or at least a high earner as our government defines it.  Nuances of small business ownership could push you into this category, or perhaps you’ve adjusted your consumption to fit your income such that you still feel strapped even as you rake in nice coin.  If these taxes do more annoy you (and rightly so), then perhaps there are other components of your personal finance game in need of a checkup.

• Medicare Tax Increase:  Paid wages in excess of $200,000 are subject to a tax increase of 0.9% starting in 2013.

• 2013 Federal Withholding Taxes:  The marginal tax rate for individual incomes above $400,000 and families earning over $450,000 increased from $35% to 39.6% in 2013.  While the prospect of forfeiting nearly 40 cents on an earned dollar in taxes is mind boggling, I do wish my tax burden was impacted by this one.

If you’re running the numbers and still cannot get the tax bill to reconcile, there’s a final wildcard to consider.

 State and Local Tax Withholding Calculations:  Many states and local municipalities that impose income taxes will use calculations that are derived from the Federal tax calculations.  As the Federal guidelines or taxes change the State/Local withholdings may adjust even if there has been no new legislation.

I think my 2013 pay checks have been impacted by at least 3 of the above items.  Unfortunately none of those were the high earner penalties, err taxes.  How about you?  Upon further review, what impacted your paycheck the most?

Make Your Life Easy

One of my favorite quotes is from career coach Dan Miller.

“Live is easy if we are hard on ourselves and life is hard if we are easy on our selves.”

The symmetry is beautiful and the message profound.  Working out every morning and eating right can be hard.  It can inject 100’s of mini sacrafices and decision points into a given week.  Yet somehow that seems easier than weighing 300lbs and hobbling on worn out knees and ankles.

Staying late to work to prep for tomorrow’s meetings may mean a reheated dinner.  Nailing the meeting with a key client or the boss could mean a sale or promotion.

The examples are easy to find.  Life seems to provide opportunities to determing our philosophy relative to this paradox on a regular basis.

Along these lines, I stumbled across a story on another site that I wanted to share.  Art of Manliness is hosting an article titled Getting Tough With Yourself.  It’s a short and simple story about the approach taken by some vets during WWII.  I personally think we could learn a lot from that generation so when I found this article and knowing its correlation with a favorite quote, I just wanted to share.

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