Payroll Update 2012

The biggest new tax break for individuals in the recently enacted “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010” is the one-year payroll tax reduction. Under this new provision, which is intended to supplement income and boost economic growth, the payroll tax—which funds Social Security—will be cut by two percentage points during 2012. Here are the details:

• The Social Security payroll tax on individual wages will be lowered to 4.2% in 2011 and 2012, from the usual 6.2% rate. For an individual with wages of $60,000, that amounts to a $1,200 savings for individuals with an income of $60,000. If the individual gets paid twice a month, it will mean an extra $50 in his or her paycheck starting in January, 2011.
• Self-employed workers will also get the tax break. Their self-employment taxes will be cut from 12.4% to 10.4%.  There is no phase out (i.e., gradual reduction) of the payroll tax reduction for higher income workers. It goes to everyone who works, regardless of income. However, since Social Security taxes apply only to the first $106,800 in earnings in 2011 and 2012, the benefit for high earners tops out at $2,136.
• The payroll tax reduction in effect replaces the $400-per-worker tax break included in the 2009 stimulus bill. That break, called the Making Work Pay tax credit, provided a tax credit of 6.2% on the first $6,450 of a worker's wages but was phased out for workers making more than $75,000 ($150,000 for couples). The Making Work Pay credit, which was billed as a way to stimulate the stalled economy, is widely though to have had little if any success in that regard, in part because of the small amounts involved—$400 for individuals, $800 for couples. The new law's payroll tax reduction, by contrast, provides a potentially much bigger tax break for taxpayers (up to $2,136 for individuals, $4,272 for couples). In addition, the benefits of the payroll tax reduction are distributed far differently than they were under the Making Work Pay credit, which was aimed primarily at low and moderate-income workers. For example, an individual making $100,000 in 2012 will be able to keep an extra $2,000 under the payroll tax reduction, but under the Making Work Pay credit (which was phased out for earnings over $75,000), the individual's tax break would have been zero.
• The employer's share of Social Security tax is not affected; it stays at 6.2%. Thus, the cost of hiring new workers isn't directly affected by the payroll tax reduction.
• The tax break was extended on February 17, 2012, for the rest of the year. There will almost certainly be efforts to extend it beyond 2012, and I will keep you apprised of any developments in that regard.
• The payroll tax reduction will cost the government an estimated $120 billion.
• The payroll tax reduction will not affect the worker's future Social Security benefit, because benefits are based on lifetime earnings, not the amount of tax paid by the worker into the Social Security system.

I hope this information is helpful. If you would like more details about the payroll tax reduction or any other aspect of the new law, please do not hesitate to call (520-918-1040) or email me at maureen@erhardtcpa.com.

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Prevent Identity Theft

I recommend you protect your personal information. Here are some helpful sites to get you started.  The following are some tips for keeping your personal and financial information private and preventing identity fraud (and those annoying telemarketing phone calls!):

• When you open a new credit card, insurance plan or investment account opt out on their privacy policy so they cannot share your information with other companies. 
• Get off the public record seller’s list, call Acxiom’s Consumer Advocate Hotline at 877-774-2094 or request a form at www.acxiom.com (under "contact us").
• Never answer an email asking for your information or advertising a free credit report.
• Register your phone numbers on the National Do Not Call list.  You can call 888-382-1222 or go online at www.donotcall.gov to register.   Make sure to renew this registration every 5 years.
• You can opt out of information your child’s school shares with other organizations, such as the military.  Go to http://www.themmob.org/lmca/about.html to find out more and find sample letters. 
• When you move and fill out a permanent change of address form the post office sells that information.  So fill out a temporary change of address instead.  This forwards your mail for a limited time so you have time to change over your address.
• Opt out of pre-approved credit card offers by calling 888-567-8688 or online at www.optoutprescreen.com
• Opt out of all those catalogs!!!  Email the full name of everyone in your house who receives unsolicited catalogs and your address to optout@abacus-direct.com
• Don’t research personal items on your work computer.  You never know how closely your employer is monitoring your internet use. 
• Pay for a blocked telephone number or dial *67 to block your number before making a call .

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No Telemarketers

I advise clients register on the Federal Government's "Do Not Call Registry".  Select the  National Do Not Call Registry so you can sign up.

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Free Credit Reports

The Fair and Accurate Credit Transactions Act was passed to help combat identity theft.  Under this new federal law everyone is now entitled to one free credit report from each of the three credit-reporting agencies (Experian, Equifax and TransUnion) each year.  You may also check your credit reports before making a big purchase such as a car, boat or house.  This information can help reduce interest rates. 

The official web site to request the free reports is www.annualcreditreport.com or you can call toll free 1-877-322-8228.  This official web site can also be accessed through the FTC’s web site at ftc.gov/freereports.  Make sure you use one of these official web sites to access your reports because imposters and scams are already popping up. 

You do not need to purchase anything, including “free” credit monitoring which will not be free after 30 days, from the credit-reporting agencies in order to get your free reports.  You should check all three of your credit reports each year to make sure you are aware of all accounts open in your name and that the amounts you owe are correct.  If you notice anything incorrect on your credit report, notify the credit agency as well as the creditor.  Call both parties, but also document your request in writing.  Credit-reporting companies must investigate the claim unless they deem it “frivolous”.  If they find the information is wrong, the company that provided the information must notify all three credit-reporting agencies.  Then the credit agency must give you a free, corrected credit report, which does not count as your annual freebie.

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Your FICO Score

FICO stands for Fair Issac Corporation; the company that created the formula that calculates this three digit score.  Many people think credit score, but really it is your FICO score.  Your FICO score determines your interest rates on car loans, credit cards, home mortgages and even your health and auto insurance premiums.  Your FICO score is based on these criteria:

• Paying your bills on time (35%)
• Total debt owed versus total credit limit (30%)
• Length of credit history (15%)
• New applications and accounts for credit (10%)
• Mix of credit cards and loans (10%)

After making sure your three credit reports are correct you should check your FICO score.  Because there are three credit reporting agencies you also have three FICO scores, but unless you’re buying a house there’s no need to check all three.  It’s important if you are making a big purchase to find out which credit agency the company you are dealing with is using and then check that score yourself.  The cost to check your score is $14.95 per agency.  Again, don’t be fooled by cheaper alternatives, they are not reputable agencies and will not give you accurate information. 

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