payroll tax cutIf you have received your first paycheck of the year, you may have been pleasantly surprised. Americans will be receiving more in their paychecks during 2011 thanks to the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. The cut is another attempt to stimulate the economy by giving Americans more discretionary income to play with.

Since Social Security tax is being reduced from 6.2% to 4.2% of the total wages that you pay, you will be getting – in essence – a 2% raise for the 12 months of 2011. All employers have been instructed to make the adjustment to your paycheck no later than the end of January.

Even if you are self-employed, you will see your self-employment tax drop to 13.3% from 15.3%.

What the Payroll Tax Cut Means to Your Bottom Line

Just how much more money will you see in your paycheck throughout 2011? It boils right down to how much you make, and the more you make, the more you will get (up to an income threshold of $106,800). The maximum benefit any individual can receive is $2,136 where couples will max out at $4,272. Overall, 155 million tax payers will benefit from the new tax break, putting into American’s pockets and additional $122 billion in discretionary income throughout the course of the year.

Will the Payroll Tax Cut Help the Economy

The tax break is intended to help stimulate the economy and many politicians and economists see the tax break as a means for long term economic growth. They are hoping the money that is being dispersed will not only help individuals, but also businesses across the country. Job growth is also anticipated as a result of the cut. In fact, it is being estimated that as many as 1.5 million new jobs (according to white house) could be created in 2011 as a result of this tax change. Keynesians, or demand side economists believe when more money is put into the hands of the middle class, they go out and spend, this in turn raises demand and helps to create new jobs.

While there are numerous people who support the social security tax break, there are equally as many who are not so crazy about it or downright think it is wrong. The question of how this will affect Social Security down the road has been raised. While the government is insisting that it will have no impact on Social Security down the road, others are not so sure. Many are worried that this tax break could have a huge impact and possibly jeopardize the funding of social security altogether. The government however, is attempting to reassure those in doubt, insisting that the funds will be made up in other ways.

Also, many Austrian economists worry over the fact that the tax cut increases our deficit (since it is not accompanied with spending cuts), which can be quite destructive in terms negatively impacting the possible capital available to businesses.

Moreover, any gain now (since it is borrowed) means that taxes will have to be raised in the future to pay back the borrowed dollars. So is it worth it?

Additionally, many are worried about what happens next year. While having some extra funds in our pocket may be great today, what will happen next year when they are taken away, as the deal is only for one year.