The payroll tax cut that boosted paychecks for millions of Americans over the past two years has expired.
Early Tuesday morning, the Senate passed a deal Tuesday to avert the feared fiscal cliff on an 89-8 vote. The Senate package would put off budget cuts for two months and preserve Bush-era income tax cuts for individuals earning less than $400,000 or couples earning less than $450,000.
The House is expected to vote on the bill today or Wednesday.
However, the payroll tax holiday introduced under President Obama in 2010 was not included in the deal and technically expired at 12:01 a.m. Monday. Should this benefit not be renewed, 125 million households will see their paychecks shrink, according to the Tax Policy Center.
According to CNN Money, more people will be impacted by the payroll tax cut expiration than those affected by proposed income tax hikes.
Should the payroll tax cut not be renewed, the Social Security payroll tax rate would revert from 4.2% to 6.2% on the first $113,700 in earnings.
“It would pull money out of peoples’ wallets, and for a lot of folks, that really matters,” Roberton Williams, a senior fellow at the Tax Policy Center, told CNN Money in December.
According to CNN Money, someone making $100,000 would receive about $167 less in their monthly paycheck — or $2,000 per year. A $50,000 income earner would see their paycheck drop by $83 a month — or nearly $1,000 a year if the payroll tax cut expires. And it continues to get smaller, with someone earning $30,000 losing $50 from their monthly paycheck.
While losing $50 a month may seem negligible to some people, it still adds up to $600 a year — a sum many low-income families can hardly afford to lose.
“The people who are going to feel it the most are people making minimum wage to about $15 an hour, because they’re the ones who are just getting by,” said John Lieberman, a CPA at Perelson Weiner LLP. “Two percent of someone’s income is a lot of money when you’re only making $400 a week.”
Expecting a raise? If the payroll tax cut isn’t extended, a big chunk of your salary hike will likely get wiped out. Since the average raise for 2013 is expected to be 2.9%, roughly two thirds of that increase would be eaten up by the 2% reduction in paychecks due to the expiration of the payroll tax. That means the worker earning $50,000 would be left only $450 better off after receiving a $1,450 raise. Meanwhile, a raise of $2,900 for the $100,000 earner would result in a net benefit of $900.
Businesses are also worried about what this reduction in pay will mean for consumer spending — and their bottom lines.
Note: CNN Money contributed to this report.