With no real end in sight, the fiscal cliff looks like it will become a reality when we get our first paychecks in January. There are two forces working against us:
The end of the temporary payroll tax cut
With the exception of certain governmental and church workers, most of us pay into the Social Security system. The tax may show up on your pay stub as "SS Tax", "OASDI", "FICA" or some other name. For as many years as I can remember, it's been 6.2%. Two years ago Congress passed (and the President signed off on) a temporary reduction of 2%. The reduction was reinstated for 2012, again on a temporary basis. If a third extension of the reduction isn't passed the tax will revert from 4.2% back to 6.2% next year.
Expiration of the Bush tax brackets
When the Bush tax cuts were put into play back in 2003, lower rates and more brackets were created. Prior to this, the first bracket was 15%, the second bracket was 25% and they climbed all the way to 39.6%. For 2012 we have a 10%, 15%, 25% and continue to a max of 35%. If the Bush tax cuts aren't extended, our bosses need to start withholding under the old laws.
A single person earning $70,000 who claims Single and zero allowances on their W-4 form at work. On a bi-weekly paycheck in 2012 they would have the following deductions:
$500 Fed Tax
Now take a look at the change to their first paycheck in January:
$573 Fed Tax
Between the return of the pre-Bush-era cuts and the return of the FICA tax to it's previous levels, this employee will have $127 less in their paycheck. If you earn more, the impact will be even worse. Let's not forget that many employers also change their health insurance premiums in January too (and usually not to the employee's benefit).
Unless the IRS takes the bold step to freeze the withholding tables at the 2012 levels, we need to brace ourselves for less money when we open that first paycheck next year.