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What the Payroll Tax Extension Means for You [UPDATE]

Push the button on the right. Come on, Congress. You know you want to.

With their approval rating at a feeble 9%, you’d think that Congress would put aside their differences and vote through an extension of the payroll tax cut set to cost the average American an extra $1000 next year.

Unfortunately, you’d be wrong.

As we stand today, the payroll tax cut (which affects 160 million American workers) is set to expire on the first of January. In other words, Congress’s “Happy New Year” gift for the country will be a smaller paycheck for workers and a smaller bottom line for businesses.

So what is the payroll tax? How did we get to this impasse? And what does the impasse mean for workers and businesses? Let’s take a look.

[UPDATE]: Looks like Washington came to their senses. The payroll tax cut has been extended for two months, so your taxes next year, at least till March, should look the same. Still, what’s below remains valid, should Congress resume squabbling.

The Payroll Tax

The short answer: 4.2% of your paycheck if we keep the extension. 6.2% if we don’t.

The payroll tax, as we wrote last week, is “a tax imposed on employers and employees by the federal government; it comes in the form of  income withholding, social security and medicare, and unemployment taxes all bundled up.” Right now, 4.2% of your paycheck is withheld for this tax. If Congress does nothing and the tax cut expires, effectively, your taxes will be raised. That means 6.2% per paycheck or, as mentioned, an average of $1000 a year for every working American.

How We Got Here

The short answer: partisan brinksmanship.

Without rehashing too much of the bureaucratic maneuvering and silly he-said, she-said politics, the Democrat-controlled Senate is pushing for a two-month extension of the cuts while the Republican-led House is hoping for a year-long extension. You read that right: both houses of Congress want to extend the cuts but can’t agree on how long and how exactly to do so.

If you’re curious about the 9% approval rating, there’s your answer.

Both sides are busy calling each other names and President Obama is asking for them to get together and work things out. On Tuesday, we’re left hoping with him.

What It Means For Workers

The short answer: less discretionary income.

While Congress haggles over long-term policy and the length of the cuts, American workers are just 11 days away from seeing an ever larger portion of their income sliced out of their paycheck. Meanwhile, millions more Americans currently getting unemployment benefits could also lose their safety net if the sides refuse to settle their differences.

What It Means For Businesses

The short answer: continued uncertainty.

Many businesses feel that the extra $1000 for workers and everyday Americans means those folks will likely put that money back into the economy. Since discretionary spending — spending on things like a nice dinner out, a movie, or a luxury item like a new television — dips when people have less money, the additional taxes paid by Americans could presumable hurt business’ ability to both hire new employees and be successful in the first place.

Now, granted, people will still spend money. But if they have less, they’ll spend less.

Some business leaders are pushing for the year-long extension of the cuts. They argue that the year gives Americans a real plan and lets them budget accordingly, instead of kicking the proverbial can down the road and re-visiting the cuts again in two months.

In other words: business wants this. Working Americans will save money. And Congress agrees we need action and wants to extend the tax cut.

But as we stand now, we’re not getting two months or a year of the payroll tax extension. We’re getting the same old song and dance from a wildly unpopular Congress that seems less and less interested in solving problems. We’re left wondering how much we’ll be paying in taxes and if Americans will have money to spend.

We’re hoping they’ll come to their senses and work things out. The optimist is us says they will.

Either way: we’ll keep you updated.

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