Your paycheck is shrinking…

The holidays are just beginning but, one holiday is coming to an end.  The payroll tax holiday which gave some tax payers an additional few dollars in their paychecks will end December 31, 2012.

The payroll tax holiday was introduced over two years ago as part of a stimulus package and extended until the end of 2012.  Although not all tax payers were able to benefit from the reduction in Social Security tax rate, many tax payers did take advantage.

Employees and tax payers who are self employed are currently paying 4.2% instead of 6.2% for their contributions to Social Security (technically OASDI – Old-Age, Survivors, and Disability Insurance).  The net effect of this increase is less money in your hands and pockets starting with your first paycheck in 2013.

So what can you do to avoid this increased tax?  If you are an employee and work for someone or a company, your options are virtually non-existent.   For small business owners who are self employed, you have one option to save some money.

Self employed small business owners can try to avoid some of the effect of an increase in taxes for 2013 by income acceleration.  Income acceleration is when you try to bill and get paid for as much as you can in 2012.  This means you should try to see if you can get customers and clients to prepay you for work that will be done in 2013.

Prepaying clients has a few benefits for you in 2012 – your cash flow improves, you will also be paying a lower income tax rate (2013, income tax rates increase) and of course, you will be paying 2% less in self-employment payroll taxes.

With rates set to increase across a broad range of taxes in 2013, there is still plenty of time in 2012 to make some important tax planning decisions.  However, time is running out.  Contact us today, if you would like to learn more about the options available to you and your unique tax situation.  Every tax payer is different and therefore, deserves and should have a customized tax plan and strategy.

Leave Comment

CONTACT US