December 24, 2010
The Meaningless Social Security Tax Rate Cut
By Joe Gimenez
A lot of people in government don't know much about business operations because they have never run a business. Examples: the current president, vice president, probably most members of Congress, economics professors at publicly funded state colleges, and most of the other people in government or government-funded organizations for whom I slave away as an independent businessman on a daily basis to pay their salary and benefits.
In the interest of giving these people a sliver of insight into real-world working conditions, I thought I'd present a glimpse into my thought processes on Social Security tax reduction of 2 percent for employees.
Now, let's make no mistake: this exercise in education is a chump-change example, as it involves only me and my sole-proprietorship (individually-owned) company, which provides marketing communications and public relations for various clients. But so many people I talk to have no conception about how the relationship of government to taxpayer manifests itself through the tax code, up and down the employment chain. Maybe this example is perfect, though -- it's simple enough for those government workers and elected officials who otherwise wouldn't understand the more complex calculations being performed by larger corporations.
And while mine may be a chump-change example, I am not alone. A Bureau of Labor Statistics report says that in 2009, there were 15.3 million self-employed people, or 10.9 percent of total employees in the workforce. So right now, there are 15,299,999 other people looking at this tax code change and thinking about what it means to them and the people they may employ. Just because someone is self-employed doesn't mean they don't have employees or use contractors.
So that we're clear, here is the new code, according to my payroll processor, ADP:
Also included in the legislation is a reduction in the employee Social Security payroll tax to 4.2 percent of wages from 6.2 percent for 2011. The Social Security wage base remains $106,800, and the employer Social Security tax rate remains 6.2 percent. The maximum employee Social Security withholding for 2011 will be $4,485.60, compared to $6,621.60 for 2010.
This is what it might mean to my clients, my current part-time employees, any future new hires that I might have the capability of adding in 2011, and myself:
- First, what this means to my clients (who are always my first thought). To them, this means nothing. I can't use this change to reduce my team's hourly rates because I doubt the calculation will continue in the future. In fact, employees' rates -- and the matching rate paid by employers -- will probably increase in 2012. Call me cynical, but it's certainly a possibility. The uncertainty will prevent my competitors from using this tax change to reduce their hourly rates, either, so I am safe in not lowering mine.
- Second, to my employees. In all honesty, I have only a part-timer on payroll right now, and we don't have a salary-oriented relationship. But if I did have employees, I'd be thinking, "Hey, they will be receiving 2 percent more in their payroll in 2011 courtesy of Uncle Sam. No need to give them much of a raise in 2011." So the reduction may have the effect of letting companies retain some money that otherwise might have been paid to employees in pay raises. These retained earnings might be good for a company's ability to reinvest, or its ability to add to dividends for its shareholders (aka the rich). Beyond the temporary 2-percent spike, it doesn't really do anything for employees.
- Third, to the potential full-time employees in 2011. I'd probably pay them less than I otherwise would have. I don't need to do otherwise. After all, they are going to be able to retain 2 percent more of whatever salary figure we agree on. They'd be happy with that. But next year, they might want more of a raise once Uncle Sam jacks the rate back to 2010 levels and they see less in their paycheck, causing them to seek a larger raise. The anticipation now of inflated salary expectations later changes my perspective. But why hire someone full-time? I might just keep going the part-time route given my fear that I might not be able to keep anyone employed in 2012 if the government class and their media cohorts whip up a "Social Security is falling" frenzy to jack rates higher than 6.2 percent (for employer and employee!) in 2012. Read my lips: Republicans don't stick to their promises, and Democrats increase taxes whenever and wherever they can.
- Fourth, to myself. As a sole-prop, I have to ask, "How will this affect me?" I assume that I will pay 10.4 percent instead of 12.4 percent on my adjusted gross income (up to $106,800), but I need to get that confirmed somewhere. I'm not sure just yet how Uncle Sam will treat my self-employment. Who knows? I may still have to pay full freight. And yes, for those in government who don't know, this year, I will pay 15.65 percent of my AGI (or up to $17,622 on the $106,800 threshold) to the Uncle Sam Social Security/Medicare Ponzi scheme. Of course, this does not include the federal taxes that will be levied on my income.
On a number of fronts, this 2-percent reduction may have sounded good to the feckless Republican dealmakers in Congress who fell for it, but its real-world effects will be dubious. It's expected to provide only about $613 more -- in all of 2012 -- for the average worker earning $35,000-$64,000.