After political bickering, the House of Representatives agreed to make a deal with the Senate to extend the payroll tax holiday. This tax cut reduced the payroll tax — a tax separate from but often associated with federal income tax — from 6.2% to 4.2% of the first $110,100 of wages. The tax benefits Social Security, a program politicians often claim is in danger of being underfunded. The payroll tax rate was scheduled to return to the normal amount of 6.2% at the beginning of 2012, but once a bill is signed into law, this rate will continue until the end of February 2012.
The Senate was only able to pass a bill that extended the tax cut for two additional months. In general, policy makers believe the lower tax rate will help stimulate the economy, but there are concerns about the effect of the long-term reduction into Social Security. After the Senate passed the bill, the House eventually relented. Part of the deal between the House and the Senate requires representatives to start working immediately on a new plan to find a way to extend the lower tax rate until the end of 2012.
Expanded federal unemployment benefits were also scheduled to end at the beginning of the year, but this bill would extend these benefits for two months as well.
The extension of the payroll tax cut and the expanded unemployment benefits will be paid for by an increase in the amount mortgage lenders must be Fannie Mae and Freddie Mac to insure loans.
An average project manager saved $1,300 last year due to this tax cut of two percentage points, and if politicians agree on extending the cut for all of 2012, that amount could double by the end of next year. When the tax cut was announced initially last year, I offered 20 suggestions for using the money you save through the payroll tax cut. With doubled savings, the opportunities for using the cash benefit are even greater.
Updated December 21, 2017 and originally published December 23, 2011.