Thanks to the tax bill Obama signed into law a few weeks ago, most people will see a small bump in their take-home pay for 2011. That is because the payroll tax, ordinarily set at 12.4% (split evenly between the employer and the employee), will decrease to 10.4% for the next 12 months.
This small but steady windfall would affect most workers and self-employed workers. For example, a worker who earns $80,000 a year would have paid $4,960 in payroll tax in 2010, but would only pay $3,360 in 2011. Self-employed workers and freelancers who pays both the employer and employee portion of the tax would also enjoy the 2% decrease on the employee side. They would pay 10.4% in payroll tax instead of 12.4%.(To see what your savings would be, Kiplinger's has a calculator to estimate the impact of the tax cut on your take-home pay).
I am very excited about any bump in take-home pay, but I also know that small amounts of money can be quickly frittered away. When I receive $1,000 or $2,000 in one fell swoop, say, a bonus or an extra big freelance commission, I feel a responsibility to be wise with windfall. But an additional $50 a week is easy to lose if I am not paying attention. A new pair of jeans here, two Starbucks run there, and the extra money courtesy of the Federal Government is gone.
Instead of blowing this windfall on something inconsequential, however, wouldn't it be great to do something meaningful for your future or your lifestyle? New York Times offered a list of suggestions on four ways to payroll tax savings wisely: paying down debt, saving for a big splurge, putting more money for retirement, or upping your charitable contributions.
These are all great ideas, and I will probably focus on saving for my dream vacation -- a jaunt to the Galapagos Islands. If I manage to put away all of my payroll tax savings, I can come out with an extra $1,000 or $2,000 to earmark towards the vacation. When 2012 rolls around, I wouldn't miss those small treats that I didn't partake in. I will surely remember, however, the experience of hanging out with the giant tortoises from which the islands get their name more than another pair of shoes.
Most bloggers I've spoken with are also determined to put their windfall to good use.
Kay Lynn of Bucksome Boomer:
I've initially upped my 401K contribution the same percentage as the decrease in payroll tax. The reason I said initially is that our CEO already let us know he won't be absorbing health insurance costs when they typically rise mid-year. I may have to make another adjustment at that time to cover that expense.
Ryan of The Financial Student:
I'll be using my tax cut to help fund my study abroad trip next year. I work part-time, so my savings will be small - around $50-$100, but every bit helps. I've set up an automatic transfer from my ING Direct checking account to a special study abroad savings account so I don't lose track of the savings!
Jacob of My Personal Finance Journey:
I am expecting my tax savings in 2011 to be ~$1000. I am planning to use the extra money to install a washer/dryer combo in my 2nd floor condominium!
How do you plan on using this increase in take-home pay?
Photo Credit: The Cleveland Kid.
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