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20 Ways to Use the Payroll Tax Holiday

This article was written by in Taxes. 15 comments.

When Congress passed the Tax Hike Prevention Act earlier this year, it included an economic stimulus in the form of a payroll tax holiday. As Leigh Mutert, CPA explained in our podcast interview, the payroll tax will be reduced in 2011 from 6.2% to 4.2%. As a result, paychecks will be a little more than 2% higher than they would have been without the payroll tax holiday. That could result in an extra $1,300 for an average project manager or $2,000 for a senior level programmer.

Unlike the stimulus checks sent out from the government earlier in this century, taxpayers won’t receive a lump sum. The payroll tax holiday is a benefit that employees will see in a small amount each pay period. The best bet, if you want to use this money to spend on one particular purchase, is to create an automated transfer of 2% of your paycheck from the bank account that receives your paycheck to another account to hold the savings. Otherwise, this benefit will most likely be absorbed into your everyday spending. The latter situation is generally the goal of an economic stimulus plan, but everyone is free to do what he or she wishes with the savings.

What are your suggestions for using this extra money? Here are some of mine.

Indulge in your hobbies and interests

  1. Take a class offered at a local college.
  2. Find a private tutor who can help you excel with your hobby.
  3. Travel and attend a seminar to learn more and meet interesting people.
  4. Advertise your hobby as a business and attract clients.
  5. Support a charity or non-profit organization focusing on your interests.

Improve your personal finances

  1. Establish your emergency fund.
  2. Pay off your credit card debt.
  3. Make an extra mortgage payment.
  4. Open a high-yield savings account.
  5. Invest in an index mutual fund.

Around the house

  1. Upgrade to energy-efficient appliances.
  2. Upgrade your entertainment system.
  3. Upgrade your wardrobe.
  4. Upgrade your electrical system from fuses to a circuit breaker.
  5. Redecorate the room in which you spend most of your time.

Have some fun

  1. Explore a local city in depth.
  2. Travel to a location you’ve never visited.
  3. Take your family to a major amusement park or resort.
  4. Buy a new computer or gaming system.
  5. Train for and earn your pilot’s license.

Add your own suggestions below.

Updated January 16, 2018 and originally published December 27, 2010.

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About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 15 comments… read them below or add one }

avatar 1 Anonymous

My top five would be:

1. Establish Emergency Fund
2. Pay off non-house/non-investment debt
3. Save for baby to be born in June
4. Upgrade to more energy efficient items
5. Look for an investment to put money toward (rental property, etc.)

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avatar 2 Anonymous

I’m looking forward to this, i’m curious to see how much it means in terms of my monthly income. My paychecks are stable, and so I’ll notice any increase when they happen.
I think that I’ll be doing a few things with it:
1) Finish Paying Down Debt
2) Build up E-fund
3) Build up a General Savings

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avatar 3 Anonymous

Invest in better equipment for hobbies.

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avatar 4 The Latter-day Saver

How about increasing the amount deferred into the 401k? You normally would not see the 2% anyway and it would have been “set aside” for “retirement” if it had gone to Social Security, right? Also, because elective deferrals decrease your Social Security base, you could defer slightly more than 2% and still end up the same, plus you would pay fewer income taxes to boot.

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avatar 5 Anonymous

I like your idea of saving the 2% in a 401k/IRA, but I am obligated to point out that elective deferrals do *NOT* decrease your SS (or Medicare for that matter) base. If you have a W-2 with tax-deferred 401k contributions to look at, you should notice that box 1 is smaller than boxes 3 & 5 (Social Security & Medicare taxable income).

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avatar 6 The Latter-day Saver

David C,

You are correct, thank you for pointing this out. I, incorrectly, was thinking that since it would decrease your taxable income for income tax purposes it would also decrease your SS base too.

Let’s all celebrate an extra 2% raise next year!

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avatar 7 20andengaged

I like your idea of automatically transferring 2% of that money to another account, which is probably what I’m going to do. Every little bit helps!

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avatar 8 Anonymous

Reduce some of the pain that is day care…some of it.

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avatar 9 Anonymous

Love the idea to automatically transfer it. With my husband’s pay, we can even do it before we get paid. Brilliant!

Do you know if there will be any change to my self-employment taxes? As self-employment taxes are basically payroll taxes, it would be nice if there were a corresponding decrease.

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avatar 10 The Latter-day Saver

Yes, there will be a reduction for self-employed individuals, too. 10.4% instead of 12.4% for the first $106,800 of self-employed income. Unfortunately, the 2.9% you pay on ALL of your self-employed income for the Medicare portion is still in full effect for 2011, too.

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avatar 11 eric

Good idea. I’ll just automate it with ING into a general savings account. :)

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avatar 12 tigernicole86

I’m going to put it towards my student loans. I’m sort of excited because it’ll mean something is going to get paid off just a little quicker. :)

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avatar 13 wylerassociate

I will be using the extra money to pay off debt and I will be relieved when it’s paid off.

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avatar 14 shellye

I like the idea of putting the extra money into my 401(k).

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avatar 15 Ceecee

Probably best to save it for the day when this reduction goes away, as it probably will.

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