How your payroll tax holiday can really mean something this year

how not to spend payroll tax holiday

Much of the $240 billion payroll tax holiday will be spent on lattes, but discipline can turn yours into real money. Image: CC i need coffee/coffee hero/Flickr

The payroll tax holiday gives everyone earning a paycheck a 2 percent raise in 2011. The government enacted the payroll tax holiday as an economic stimulus and hopes you will spend it. But there are better ways to use the payroll tax holiday to stimulate your own economy in the next two years.

Happy payroll tax holiday!

To figure out how to use your payroll tax holiday, calculate how much the tax break will add to your disposable income. Until Jan. 1, you’ve been paying 6.2 percent of your wages to Social Security. For the next two years you will only pay 4.2 percent. Two percent doesn’t seem like much, but it adds up to $120 billion a year the government won’t be spending on weapons, Fannie and Freddie or ethanol subsidies. The Obama administration is counting on you to spend your fair share instead, on everyday essentials like lattes, smartphone apps and cigarettes.

How much is your payroll tax holiday worth?

The payroll tax holiday is designed so that a little extra money trickles in every pay period. The money shows up in such indiscernible amounts that most people won’t notice as it’s spent. But over the course of a year, the nickels and dimes add up to dollars. For example, two percent of $40,000 a year is $800. The best way to corral that bonus is electronically. The simple strategy is to divert 2 percent of your paycheck to an additional savings account set aside for the payroll tax holiday. Then use it to reward yourself for your discipline by paying cash for something you always wanted.

Maximizing your payroll tax holiday

Paying down debt is the absolute best way to use your payroll tax holiday. Your credit cards probably carry 15-to-20 percent interest. Saving money on credit card interest adds more to the value of your 2 percent raise long after the payroll tax holiday is history. If you make an automatic electronic payment, increase the monthly amount by 2 percent of your paycheck. You take home the same amount you did before, and your debt is reduced faster. If you have a 401K, boost your contribution by 2 percent. In two years you’ll have $1,600 extra. If your employer matches, $3,200. In 20 years at 6 percent a year you get $10,593. Now that’s a tax break.


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