tax cut for payrollYou may not realize it, but chances are that you have been enjoying a tax cut. The reason that the tax cut has been mostly invisible to most workers is due to the fact that it is a payroll tax cut, which means that it is part of your pay. Instead of having 6.2% of the first $110,100 of your wages taken out to help fund Social Security, you’ve only had 4.2% taken out for more than a year.

The payroll tax cut was enacted toward the end of 2010 as part of an effort to stimulate the economy. The tax cut took place at your paycheck source, so it resulted in a bigger paycheck for all of 2011, and was extended to include all of 2012. Many people have been enjoying a larger paycheck as a result. For someone making $35,000, the increase has been about $58.30 each month.

When the payroll tax cut expires, it will come with a reduction in what you see coming home each month. Yearly taxes for someone earning $50,000 a year are expected to go up by $1,000. That seems like a lot – especially when it is represented as a $83 reduction in what you take home each month.

Depending on your income level, you will be affected more or less. Even the self-employed are getting a break on their payroll taxes on the employee side (although they still have to pay the employer side). The payroll tax cut has been there, silently adding more to your take home pay, for almost two years.

What Happens When the Payroll Tax Cut Expires?

There are questions about what happens when the tax cut expires. The point of the payroll tax cut was to provide consumers with more money in their accounts each month. The increase in income was supposed to result in more spending, and help stimulate the economy. While there isn’t a lot of information on exactly how helpful the pay cut has been (the economy has improved, but very little, and very slowly), the Congressional Budget Office thinks that letting the tax cut expire will provide $95 billion in revenue for next year.

Another problem, though, is what happens when consumers suddenly discover they have less in their budgets each month. Some experts, including those at the Congressional Budget Office, think that the increase in revenue won’t be enough to make up for the fact that Americans will feel it in their budgets – and that could mean less spending and another recession in 2013.

Politically, of course, the expiration of the tax cuts is another animal. Even though the payroll tax cut has been a departure from the norm, many consumers now think of their bigger paychecks as the way it’s supposed to be. Letting the tax cut expire would be the equivalent of a tax hike to many, and with times still tight for many middle class families, that would likely induce outrage.

No one knows what Congress is likely to do. By the time the need to address the payroll tax cut issue arises elections will be over and it will be a lame duck Congress. Plus, few Americans seem aware of the issue, and it may not be addressed at all if it isn’t recognized by the current campaigns.