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How Much the Payroll Tax Cut Would Put in Your Pocket in 2012

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Obama Visits North Carolina To Promote American Jobs Act

Obama Visits North Carolina To Promote American Jobs Act

Sara D. Davis / Getty Images
Updated September 15, 2011

The centerpiece of the 2011 American Jobs Act is a one-year extension and expansion of the payroll tax cut for workers first put in place earlier in the year. The payroll tax cut is expected to cost the federal government $175 billion, but help create hundreds of thousands of jobs and revive a slumping economy.

See also: Obama and the Transaction Tax

"It will provide a jolt to an economy that has stalled, and give companies confidence that if they invest and hire, there will be customers for their products and services," President Barack Obama said during a rare joint session of Congress in September 2011.

So what is the payroll tax cut Obama is proposing, and what would it mean for your paycheck in 2012? Here are answers to a few of the most common questions about the president's proposed payroll tax cut.

About the 2011 Payroll Tax Cut

Generally speaking, a payroll tax is any levy by a local, state or federal government on workers wages, tips and other compensation. Specifically, employers are required to deduct specific portions of workers wages to pay for the federal Social Security and Medicare programs.

See also: 10 Tax Mistakes to Avoid

Before the payroll tax cut went into effect, American workers paid 6.2 percent on earnings up to $106,800 into the Social Security program. But the 2010 Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act imposed a rare payroll tax cut. The measure cut payroll taxes by two percentage points, to 4.2 percent.

Economists warned that allowing the payroll tax cut to expire in 2012 would hurt an already weak economy. "If they are not extended, real GDP growth will be nearly a percentage point slower in 2012 and there will be approximately one million fewer jobs by year's end," Moody's Analytics estimated.

The median household income in the United States is about $50,000, meaning that the payroll tax cut resulted in about $1,000 more in their pockets during 2011. Households earning $40,000 a year saw about $800 on their paychecks during the year. And those earning $30,000 a year got about $600 more.

How the Expanded Payroll Tax Cut Would Work

The payroll tax cut extension and expansion would reduce the withholding rate from 4.2 percent to 3.1 percent for workers on earnings up to $106,800 in 2012. Obama's proposal would also cut the portion of the Social Security payroll tax paid by employers from 6.2 percent to 3.1 percent on up to $5 million of wages.

See also: How Much Do You Pay in Income Taxes?

"Pass this jobs bill, and all small business owners will also see their payroll taxes cut in half next year. If you have 50 employees making an average salary, that's an $80,000 tax cut," Obama said in his address to Congress.

That's a sizable payroll tax cut for businesses. But what would it mean for the average household?

How the Extended Payroll Tax Cut Would Affect You

The 2011 American Jobs Act would impose a further payroll tax cut for American workers, equivalent to about a cent on every dollar earned. Over the course of a year, though, that adds up.

Here's a breakdown of the impact of Obama's proposal on workers:

  • HOUSEHOLDS EARNING $100,000 paid about $4,200 in Social Security payroll taxes in 2011, about $2,000 less than the previous year. In 2012, though, they would pay about $3,100 in payroll taxes, a savings of another $1,100. Those households would see their paychecks increase by about $21 a week in 2012.
  • HOUSEHOLDS EARNING $80,000 paid about $3,360 in Social Security payroll taxes in 2011, about $1,600 less than the previous year. In 2012, though, they would pay about $2,480 in payroll taxes, a savings of another $880. Those households would see their paychecks increase by about $17 a week in 2012.
  • HOUSEHOLDS EARNING $60,000 paid about $2,520 in Social Security payroll taxes in 2011, about $1,200 less than the previous year. In 2012, though, they would pay about $1,860 in payroll taxes, a savings of another $660. Those households would see their paychecks increase by about $13 a week in 2012.
  • HOUSEHOLDS EARNING $40,000 paid about $1,680 in Social Security payroll taxes in 2011, about $800 less than the previous year. In 2012, though, they would pay about $1,240 in payroll taxes, a savings of another $440. Those households would see their paychecks increase by about $8 a week in 2012.

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