OK. I promise that I won’t be talking about political subjects here very often. In fact, politics usually bores me. But there are times when something happens that affects the very things I am working with on a daily basis. The recent hoopla over the “Payroll Tax Cut” is a case in point.
First of all, it isn’t a “payroll” tax cut. It is a cut in the rate deducted for the OASDI portion of the FICA tax. OASDI stands for “Old Age, Survivors and Disability Insurance” and FICA stands for “Federal Insurance Contributions Act”. Before the “cut” employees and employers both contributed 6.2% of earnings, up to a certain level, of wages employees received. After the “cut”, the employee share was reduced to 4.2%.
What a lot of people don’t realize, however, is that this tax is levied only on the first $106,800 earned in 2011. ($110,100 in 2012) This makes the tax rate very unfair to those who only earn $30,000 or $75,000 as compared to those who make over the limit.
While Congress continues to squabble over how to pay for this cut – I have a solution. Tax everyone equally. If everyone paid the same rate for OASDI, like they do for the Medicare portion of FICA, the actual rate could be lowered, and Social Security would still have enough money to function.
See my table below:
|FICA Tax Analysis (Employee share only)|
|Actual Wage||Taxed Wage||FICA Tax 6.2%||FICA Tax 4.2%||Savings||Actual tax rate||Additional tax if all earnings were taxed at 4.2%||# of average workers savings paid for|
|Average US worker||30,000||30,000||1,860||1,260||600||4.20%|
|BCS Football Coach||1,100,000||110,100||6,826||4,624||2,202||0.20%||41,575.80||69.293|
In addition, Congress has only extended this “cut” until 2-29-12, which is two months into the first quarter of 2012. This means that every single employer who will be filling out a 941 form next year will have to have special coding in their payroll software to identify wages paid before 2-29-12 and wages earned after 3-1-12. I have a headache already.