Increased Payroll Taxes Pinch Some Middle-Class Families

Even though Congress struck a last-minute deal to avoid the fiscal cliff, taxes are still going to go up for millions of Americans in the new year. That's because payroll taxes are scheduled to revert to where they were in 2010. Most workers will see an increase of 2 percent, which could mean up $100 less each month for some families.

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AUDIE CORNISH, HOST:

From NPR News, this is ALL THINGS CONSIDERED. I'm Audie Cornish.

ROBERT SIEGEL, HOST:

And I'm Robert Siegel.

We may have avoided the fiscal cliff for the moment, but most Americans will still feel a dip in their take home pay this year. That's because payroll taxes that fund Social Security were not on the negotiating table this week in Congress. They are resetting back up to where they were at the end of 2010. It's an increase of two percentage points.

And as NPR's Kirk Siegler reports, that's a big deal for some middle class families in this sluggish economy.

(SOUNDBITE OF A BARKING DOG)

KIRK SIEGLER, BYLINE: Brandon and Theresa Reese feel like they did everything right. They waited until they felt financially secure enough to have a baby, and buy this modest house in a mostly working-class neighborhood in Encino, northwest of Los Angeles.

THERESA REESE: We're not poor but we're not rich. We're, you know, doing all right.

SIEGLER: The Reeses didn't overspend, so Theresa could afford to stay home part-time from her marketing job and raise their now eight-month-old son, Colin.

T. REESE: Instead of paying to have someone else raise him for us, which was our goal all along. We kind of, you know, waited until we were in our 30s and we have our house, and we kind of have our whole situation all set. And we really made our budget tight but we were able to pull it off.

SIEGLER: But the frustrated Reeses now feel they've been caught in the tangle of Washington politics. They followed the fiscal cliff drama closely, and are relieved their income taxes aren't going up, for now. That would have been the biggest hit, they say. But the couple makes just under the cap of $113,700, so all of their wages are now subject to a 6.2 percent payroll tax. People who earn more than the cap aren't taxed at the same rate.

BRANDON REESE: You know, it's not a huge amount of money but it's something we definitely rely on every month in order to cover all of our bills.

SIEGLER: The Reeses have done the math and they figure they'll have about a hundred bucks less each month toward their family budget.

T. REESE: I mean, we also refinanced our house already just so we could save about that much money that they would be now taking. Just, you know, every little cut that we could do, we've pretty much done it.

SIEGLER: Cuts, like move to a cheaper cell phone plan. Brandon may also start paying a little less each month toward his student loan debt. He's a business analyst at a nearby software company. What they want to avoid, though, and they're not sure they can, is Theresa going back to work full-time.

B. REESE: My wife working more than this little part-time hours that she does put in was something that we've kind of mentioned and we're really, really hoping to stay away from because we like the amount of time she's able to spend with our baby.

SIEGLER: While it's especially acute here in the sprawling San Fernando Valley, this kind of small but still significant squeeze is no doubt playing out in middle class pockets like this across the country. The payroll tax holiday was never meant to be permanent. It was passed in late 2010 as a stimulus, to put more money in workers' pockets while the economy was down. But people got used to it and now it's going away.

JORDANN BRADLEY: Oh hey, Kirk. I'll buzz you in, man.

SIEGLER: OK.

(SOUNDBITE OF A TONE AND MACHINERY)

SIEGLER: Thirty-year-old Jordann Bradley has lived in the Valley all his life. He and his wife currently share this apartment, though the two are rarely here. Both are putting themselves through college. She is still at work at a nearby jewelry store. Jordann is home from his IT job.

BRADLEY: For me, I think that two percent payroll tax really stuck with me, just because my wife and I, we are, you know, we're middle class. But most of all, we're the working class.

SIEGLER: The Bradley's figure, combined, they'll take home about $115 less a month.

BRADLEY: That's school books for a couple semesters. That's groceries for a few months. With the gas prices, that's gas for a few months.

SIEGLER: Bradley says he can see both sides of the argument. He understands keeping the taxes lower gives him a little bit more money, but there's also the debt to think about. Still, for he and his wife, the right now is most important, their day-to-day expenses and things they can't plan for.

BRADLEY: You know, what if the car breaks down? What if the transmission goes out? You know, what if something, you know, unforeseen medically happens that's not covered by insurance? Well, you know, that $700 that we could count on before suddenly becomes a vital part of, you know, of our survival.

SIEGLER: But it's a reality Bradley will have to deal with for now. There was little political support to extend the payroll tax holiday, especially with the national debt mounting. And a gridlocked Congress that only reached a temporarily deal on most other taxes and spending, after months of debate.

Kirk Siegler, NPR News.

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