Late last year in an effort to “stimulate” our economy, employees were given a 2% payroll tax reduction.  In years’ past, employees were taxed at 6.2% for Social Security (capped at a specific income amount, which is adjusted for inflation) and another 1.45% for Medicare (which is not capped).  Employers pay an identical amount on wages.

The tax reduction means that the Social Security tax is limited to 4.2% for the employee’s expense.  Some articles that I have read suggested that the average American wage earner can expect to receive an additional $1,000 in net income this year.   Unfortunately, unless Congress acts by the end of this year, this tax savings will be lost in 2012, as the old rules of taxing at 6.2% would return.  President Obama, though, wants this tax savings to be continued and perhaps expanded so that the rate is reduced to 3.1%.  Without an extension of payroll tax relief, all Americans, including those with lower incomes, would be facing a tax hike!

The idea behind passing a law that reduced payroll tax was that Americans would receive more money in each paycheck, which they would spend.  In theory, that additional spending would somehow stimulate our economy.

If the government wants to stimulate the economy, it should consider offering that savings (the 2% payroll tax reduction) to employers.  Using the “average” tax savings number of $1,000 per American worker, if an employer had 50 employees earning $50,000/year, this savings would allow that employer to hire one additional person without increasing its payroll expense.  The net out-of-pocket cost to the employer would payroll taxes and employee benefits, such as health insurance.   Could you imagine spending $8,000-10,000 for a $50,000/year worker?  Maybe that would stimulate our economy – especially when you realize how many employers have hundreds or thousands of employees!

Please contact your senator and house representative to ask them to support continued payroll tax savings, including a tax break for employers.