Unless you’ve been living under a rock recently, or have not looked over your paycheck this year, you’ve probably noticed that your take home pay has suddenly decreased by 2%. I realize that the title is a bit of a misnomer as the payroll tax did not increase, per se; rather, the payroll tax holiday expired. This decrease, from 6.2% to 4.2%, was a means by Congress and the Obama administration to help give middle class Americans more take home pay. Politics aside, as that is not the purpose of my post, the expiration of the payroll tax holiday is something that will impact many Americans. Many are saying that the “average” family will feel a loss of roughly $1000-1500 per year to their take home pay. To some this might seem like peanuts, but to many families this is their annual summer vacation or means fewer groceries at the grocery store or less savings. We all knew, or should’ve at least, that this payroll tax holiday was going to come to an end at some point. So, now, we must look for ways to continue the same lifestyle with either less cash or simply make cuts. The beauty of many of these ideas to make do in light of the payroll tax issue is that they can be done at any time and are a great way to be frugal and stretch your budget.
Your Withholdings are a Great Way to Stave Off the Payroll Tax Problem
I’ve written before about getting big tax returns and this is a great time to look at your tax withholdings. I know the argument for a big tax return is that it’s a way to not foolishly spend your money throughout the year or a way to get something nice at year end. However, why would you trust our government to spend your hard earned money when they’ve shown that they’re incredibly shortsighted as to how to spend it in the first place? If you’re getting tax returns to the tune of several thousand dollars then you’re likely missing out on several hundred dollars a month that could be in your pocket now. If you find yourself in this situation, making some changes to your withholdings is a great way to mitigate the payroll tax issue.
Increase Your 401k Contribution
Giving to a 401k is an easy way to save money towards retirement and can come directly out of your paycheck. I know it may seem counterintuitive to take more money out of your paycheck now that you’re getting 2% less off the top, but it does work. The nice thing about your 401k contribution is that it lowers your taxable income. Of course, I want to give the disclaimer that if your company does offer a 401k match then put away at least the amount to get the full match. Not doing so is simply throwing away free money…which is my favorite!
Look For Unused Memberships
If your family is like mine then you have numerous memberships and those memberships usually cost a fair amount. Take a look at how often you use each membership and whether or you can justify its cost. We’ve done this recently as we were just simply looking for ways to save a little extra money. We had a membership to the local botanical gardens. Our kids and Mrs. Frugal Rules especially love going there. I want to be able to provide that for them as well. However, with the chaos and busyness of life we never make it there. Looking back over the last few years we’ve only been twice and that was for a Mother’s Day brunch. The thing is that you already have to pay a fee for the brunch, regardless if you’re a member, and the fee also gets you in to the gardens. It just made sense to cut the membership as we never used it. That money easily went back to our budget and was done prior to the payroll tax debate.
Take a Look at Your Bills
I hate paying bills like the next person, but the payroll tax increase might force you to take a look at your bills. Do you have cable TV? It’s likely you have channels you’re not watching and if so you can possibly lower your programming package. You can also simply call and ask for a lower rate. My wife will do that several times a year and it’s nothing to get $10-15 per month knocked off our bill for a year. You could also look at car insurance. Perhaps you could increase your deductible which would possibly lower your monthly rates. You could also look at ways to bundle insurance coverage in order to get a lower rate.
Tighten Your Belt
I know that losing $100 per month or so will be felt by many families, especially if you were not prepared for it. The payroll tax increase will force you to be more creative in your spending habits. Maybe it means you replace a few nights of eating out with making a creative date night at home. Maybe it means that you cut things from your budget entirely. It could also mean looking for ways to bring in more income like taking on a side gig or selling unwanted/unneeded stuff on EBay or Craigslist. While the loss of this extra take home pay will hurt many, and from recent consumer spending reports it has, there are ways that you can make up for this if you think creatively.
Were you prepared for the expiration of the payroll tax holiday? What are some creative ways you’ve used to cut corners on your budget or bring in some additional income?
Photo courtesy of: Matt Aiello
My family is like yours John, we have so many unused memberships that seem to crop up all the time. When we sign up they seem like such good ideas, but then after a while you never use it anymore and the money you pay each week or month is being terribly wasted.
Glen @ Monster Piggy Bank recently posted..How Much Does it Cost to Have a Baby?
I totally agree Glen. We’ve really lowered the amount of memberships we take on as it just gets to be too much. Some are ones we really want, but just can’t justify it in the end.
Great tips John. I have considered increasing my 401k contribution this year, but wanted to look into getting an IRA before doing so. We don’t have many memberships, but I make sure to utilize the ones we do have (like Spotify for music).
DC @ Young Adult Money recently posted..7 Perks of Being a Full-Time Employee with Benefits
Thanks DC! That can potentially be a tough call, especially depending on the type of IRA you fund. Anyway I can keep more money and less going to the feds is a given in my book.
Great tips! The 401k deal will be a little tough because if you increase your 401k contributions then you just lost more money out of your budget. I was shocked at how much we lost out of my wife’s paycheck because of the recent changes. It’ll hurt our saving efforts but we’ll figure out other ways to live below our means.
Jason @ WorkSaveLive recently posted..Easy Spinach Tortellini Soup Recipe
Thanks Jason! I agree the 401k increase can be tough for some, but I like that it decreases the taxable amount plus allows me to save money as opposed to giving it to the feds. That 2% does not sound like much, but it’s much different when you see it on paper.
Yeah, we knew about the increase, but of course, were still not happy about it. I love your idea about increasing 401k contributions to lose less money to SS tax. I agree with Jason about it taking money away on the front end, but I’d rather give that money to me than back to the gov’t. Great post, John!
Laurie @thefrugalfarmer recently posted..Fire!
I was not happy either, but knew it really was just a temporary gift at the most. I love being able to keep more of our money as opposed to sending it off to the government, even if it’s only a little bit.
These are all great ways. Luckily we never budgeted in the increase, as we knew it would be going away.
Michelle recently posted..I’ll Never Be a Frugal Blogger
Thanks Michelle! We never did either, so I am glad we were prepared.
It might not seem like a lot but all the little cut backs and price increases add up. I really feel for the families that will be affected by this.
Money Bulldog recently posted..Grab The Best Remortgage Rates While You Still Can!
You’re exactly right Adam. It does not seem like much, but it does add up for many families.
I was just thinking that we may change our withholdings. We always get a refund so I might as well tweak things do that we don’t!
Holly@ClubThrifty recently posted..Invest in Gold for Extra Cash
I am a hawk about that Holly. I hate getting a big refund and would rather have my money throughout the year. The government wastes enough of our money as it is.
John, I really like your list here. Especially item #1. It never occurred to me to check my withholdings to mitigate this tax increase, but that is certainly an excellent solution. Thanks
Jason Clayton | frugalhabits recently posted..15 More Side Business Ideas – You Can Start Today
Thanks Jason! Many people don’t catch that, and I didn’t for many years. But, many can easily adjust them to put a nice little bit in their pockets and still get a bit of a refund at the end of the year.
Good tips John! We are looking at ways to adjust our budget and look for more ways to save.
Mackenzie recently posted..Healthy Stuff…
Thanks Mackenzie! I think that’s a good par of this, that it is forcing people to look at their budgets more.
The 401(k) can help you offset the loss, but not in entirety – you still have to pay payroll taxes on any income that goes to the 401(k). Still, probably a good idea for many people, regardless.
One way to decrease payroll taxes (and this is a YMMV one), is if you have access to a high deductible health plan and a corresponding HSA where your employer can deposit money. If your employer sets it up as a cafeteria plan, they can literally send the deductions straight from your paycheck and reduce the payroll tax basis – a nice little benefit (if you’re over the Social Security limit, you can still save the Medicare portion).
PK recently posted..Treasury Return Calculator
I would agree, it doesn’t help entirely, but it can help some…plus you get to keep more of the money for yourself as opposed to sending it to the feds.
That’s a great point about the HSA possibility, I had not thought about it. It could, potentially, be a great way to help offset the difference. Thanks for stopping by!
I would make sure all my tax deductible items are claimed. Home office costs, charity donations, etc. many people forget to claim that back.
Pauline recently posted..A Beginner’s Guide to a Minimalist Home
That’s a great point Pauline! We’re very mindful about that ourselves in running our own business. It does all add up in the end.
Oh yeah, that’s why we haven’t seen any increase in the take home pay even after a raise. Oh well…
We’re doing ok so it’s not a big problem. I’m self employed this year and I’ll have to start sending in quarterly estimated tax. Sucks…
Midlife Finance recently posted..The Basics of Insuring Your Car
That is a major drag that’ll affect many people who’re lucky enough to get raises. I am all too knowledgeable of estimated taxes…I hate making those checks out each quarter.
Good article John! I’ve definitely noticed the change! I actually plan to do your first suggestion of increasing my witholdings. I’m going to make the adjustments off this years returns. I went up 1 number last year and might need to do 1 more.
John @ Fearless Men recently posted..16 Guys Night Out Ideas | Dust off the Low Rider and Rally Up
Thanks John! Other than the 401k increase, that is my favorite way to make up for this. Anytime I can keep the money during the year as opposed to getting a huge check at the end of the year I’ll take it.
Great tips, John. The lure of a big tax return is certainly understandable, but you’re right – most people are better off changing their withholding so they receive more in their paychecks now. Plus, I find most people treat their tax return as an excuse to buy stuff whereas they may be more mindful of how they use their regular paychecks.
I need to take a look at our memberships too. It’s so easy to keep paying the monthly/yearly dues out of habit without really considering whether we’re taking advantage of the programs to justify the expense.
Shannon Ryan @ The Heavy Purse recently posted..The Myth of No
Thanks Shannon! It is understandable, and I enjoyed it in earlier years as well. However, I learned quickly that I’d rather have that extra hundred dollars each month as opposed to several thousand dollars at the end of the year. You bring up a great point that it can be easily used as an excuse to buy something that’s not necessary. I’d rather have the money to save for various goals throughout the year.
Great tips! It is a shame that just as many Americans were working on recovering from the downturn of the economy over the past few years and now they have to deal with this and make even more changes to the way they manage their money.
Tackling Our Debt recently posted..69 Fantastic Ways to Make Money
Thanks Sicorra! I would agree with your statement. I think a lot of it comes down to the fact that the American tax system is in need of a MAJOR overhaul to be more fair across the board as well as easier to understand.
I know my girlfriend felt the 2%. Right before the end of the year she was excited that she got a small raise. Now she basically has broken even. Could be worse though. For better or worse, I don’t pay into SS. I am under the university system in Illinois and they don’t take it out of our check, but I wont get anything later on. I think I prefer it like this anyway.
Ian recently posted..Sell Your Used Stuff! Craigslist Edition: The Exercise Bike!
That’s what sucks about it Ian…many people who were lucky enough to get a raise saw the large majority of it wiped out and essentially end up at a loss when you count in inflation.
I made sure to not count the extra money. I tightened our belt and got rid of some services. I also adjusted my withholdings. I should be good.
Grayson @ Debt Roundup recently posted..The Reality of Family Debt and How To Manage Your Way Out
That’s great, I think you’re in the minority Grayson. By not counting on it you should be just fine.
Ideally, people would have saved that 2% when the tax holiday started, knowing it wasn’t permanent, but that just isn’t human nature. Taxes will keep going up, I’m afraid. It’s very important to cut out anything that isn’t necessary if it doesn’t bring you value.
Kim@Eyesonthedollar recently posted..Reformed Spenders Adjust to Life on a Budget
Exactly Kim, but sadly many did not and I agree it really does come down to human nature. I agree that taxes will, more than likely, go up and we need to be prepared for that.
As business owner I seen this coming a few months in advance and a lot of my employees even confronted me and asked me why their taxes were going up. For most of them it was a loss of $10 to $15 dollars a week which can add up to quite a bit in a years time. On the other hand a lot of them have opted into the company retirement program and it will help a little to balance things out.
I bet being in that role would put a different perspective on this whole issue. Running our own business we can see it to some extent as we have to pull money out to pay for estimated taxes. We continued to pull out the same amount as we did not need it to live on. Opting into the retirement program is a great way to help balance it out.
I went the belt tightening approach. It was very frustrating to me to have to revise my 2013 budget down. At my 50% savings rate, there isn’t a lot of wiggle room.
Might I suggest one other way to avoid the Social Security tax increase. Stop paying payroll taxes entirely. Investment income, including dividends is not subject so social security or medicare taxes. Additionally, the tax rates on investment income are lower than wage income. So by shifting your income from wages to investments you not only work towards financial independence through building income streams, but also save crazy amounts of money in taxes.
My Financial Independence Journey recently posted..8 Things To Do Before You Start Investing (or most of personal finance summed up in one post)
I’d imagine there would be little room to budget if you’re saving 50% of your income, which is awesome by the way.
You bring up a great point about shifting your income to being more reliant on investments. I’ll be interested to see how much longer that possibility sticks around as I think it’s inevitable that taxes will go up at some point.
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My wife and I were prepared but we were lucky enough not to have any debt so while it is unfortunate that we aren’t able to save and invest as much, at least we didn’t have to cut back on our current lifestyle.
Brick By Brick Investing | Marvin recently posted..January Income 2013
That’s great that you were prepared Marvin, unfortunately too many were not.
I love that you included increasing your 401(k) contributions. I think those tax breaks are often overlooked when trying to reduce your tax burden.
Elizabeth @ Simple Finance recently posted..4 Money Management Tips For College Graduates
Thanks Elizabeth. It won’t make up for all of it but it can help. Plus, any time I can keep money as opposed to sending it to the government is a good thing.
We’ve shifted our withholdings, but it was prior to the payroll tax increase. I usually look forward to filing…I don’t know if this year will be as sweet!
femmefrugality recently posted..Big Let-Downs on the Deal Front
So, do you usually get a big refund then? I typically like to get it as close to 0 as possible so I get nothing back and owe nothing. That way I can have the money throughout the year.
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