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?

Baby Step Two, DONE!

Celebrate the New Begining | 2009

Success has been achieved!  A mountain has been scaled and a once inconceivable objective is now marked done and DONE!

Debt is largely accepted as normal and we’re so easily swept into that mentality.  Often we’re so numbed to debt as normal that thoughts of getting out of it don’t surface until it’s too late. 

Getting out of debt then becomes an impossible task.  It is overwhelming.  It is climbing a mountain, losing weight, and running a marathon at once.  Who can possibly do it?

Well… I know for a fact that YOU can do it.  And how can I make a declaration so bold?  Well, because the old adage rings true, if I can do it, so can you!

That’s right – sorry if I’m being a little circular in my presentation today – We have just in the last 3 days paid off the very last of our household’s non-mortgage debt! 

Baby Step 2, CHECK!

 

Such an accomplishment deserves a story, so here’s mine.

In so many ways, I am the picture of average.  I went to college and signed up for a couple easy to get credit cards and I was off.  A super cool stereo was my first really big and really unnecessary purchase.

After grad school I had more than a couple grand on cards and a fresh student loan.  When my classmates were walking the stage, I was financing a motorcycle.  Soon thereafter, I had to furnish a new apartment – college digs simply wouldn’t do in the ‘real world’ and so by the day I showed up for work on the very first day of my career… I was roughly $35,000 in the red.  How could that be?  I was fresh out of school and my starting salary was only $34K.

Only my spending didn’t stop.  More furnishings, and more clothes, and more and more and more.  My debt balance soared to nearly $50k – I foolishly bought a new car when my trusty truck with 140k miles was totaled – before it struck me hard and fast.  I was not going to out earn my spending, especially when every raise was accompanied by a new lifestyle enhancement. 

Something had to be done…

That thought quickly passed with my next raise – a pretty good one actually – and I rethought my thesis.  Perhaps I could earn my way out…. But alas, that proved fool hardy for even as my salary increased the weight of my debt continued to crush.

Budgeting was a big help.  I was able to stem the flood of new debt and I stopped bouncing checks at the end of what felt like every month, but freedom was a lifetime away.

So in proper fashion, I bought a house got married and bought a larger house – keeping (and feeding monthly) the first house as a rental.  I was able to make small strides but I felt ridiculously paralyzed and materially aggravated with my situation.  I was failing.  At least that represents how I felt.

Then a completely incidental, totally disposable conversation in passing planted a seed that triggered a series of events that started to turn the tide.  Most will find this silly but those that know me well will say “bingo”.  A co-worker started talking about her husband’s iPod – something I was wholly against until she started speaking magic words…. Her husband downloads radio programs that he would normally miss while at work and listens to them on his drive to work…. Radio programs you say?  Like maybe even sports radio programs?!?! 

Hook baited, dropped, bit, and set.  Apple reeled me in that night as I went straight to Best Buy and put an iPod Nano on my Amex.  How ironic.

One thing led to another and I was quickly obsessed with finding more abbreviated radio programs to download and that’s when I stumbled onto Dave Ramsey and reluctantly added him to my mix.  Several days went by before I listened to the first show.  I was so sure that he’d convict my approach to finances and I didn’t want to hear it.  That is until one night, in a crappy hotel room in Louisville, KY having run out of sports talk shows, I decided to give it a go.  From the start I was relaxed by his manner and humor and damn there are some crazy broke folks out there.  I listened to several shows over the next couple days entertained, but convinced his message was not for me.  Until one day it dawned on me that his message was directed right at me.

I get that it’s hokey and clichéd but it’s the truest of stories.  I was hooked and within a couple months I sold the rental house and plucked some funds from savings and recalibrated my budget and designed a debt snowball tool and was a fanatic. 

A job transition and period of unemployment halted my progress for a spell.  We suspended the elimination process long enough to replace a failing car but once we got back on track, we were full tilt and here we are.

For years as I lugged around, card hopped, and debt consolidated my way in circles a single thought persisted.  Though I had literally paid it off tens of times over, I continued to view my credit card balances as representing that very first stereo purchase.  Every time I would think of my mountain of debt, I’d think of the purchase that really started it all.

So just this week as I signed the check cutting the debt cord do I feel like I FINALLY own that darn stereo.

And so that’s probably more narrative that I had intended – could you tell I got a little caught up?  But I’m excited about the path I’ve carved and the future I’ve now enabled.  I do think there are a few “how to” nuggets buried in the story to assist your cause.  But more than absolutely anything, I hope you take away the knowledge and understanding that YOU can do it too.  Because I have now done this – and I know how I once thought about this target – I’m certain you can too.

Build both your budget and resolve and get to it.  Meanwhile I’m going downstairs to blast some Zeppelin on MY stereo!

Photo By: rAmmoRRison

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