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Would Obama’s payroll tax cut hurt Social Security?

The Congressional Super Committee hasn’t even started cutting Social Security, but advocates are already expressing concern on a different front: the payroll tax cut extension proposed last night by President Obama as part of his jobs plan. Those payroll taxes fund the Social Security program.

The President asked for a $175 billion one-year extension and expansion of the employee payroll tax holiday now in place, halving the tax rate to 3.1 percent in 2012. He also proposed halving employer payroll taxes to 3.1 percent for the first $5 million of payrolls in 2012. The president also wants a complete payroll tax holiday that would apply when companies grew their payrolls by up to $50 million in a year by hiring  new workers or raising the salaries of existing workers.

These cuts in the Federal Insurance Contributions Act tax (FICA) may be one of the best available stimulus options in the current political climate, and they will have a positive economic impact. An analysis by The Center for Budget and Policy Priorities notes that the cuts already in place make a substantial difference in the spending power of middle class families, and that allowing them to expire at this time would be very negative for growth:

Failure by Congress to extend the temporary payroll tax cut enacted last December would reduce all paychecks starting on January 1, withdrawing needed support from the still-weak economy. The measure, part of the tax cut-unemployment insurance deal between President Obama and Republican leaders, reduces the employee share of the Social Security payroll tax, boosting workers’ take-home pay by an estimated $120 billion in 2011. The tax cut is worth $934 to the average worker.

And Moody’s Analytics estimates that allowing the payroll tax cuts to expire would reduce GDP growth by one percentage point in 2012, translating into one million fewer jobs by the end of next year.

But Social Security advocates worry that these temporary payroll tax cuts will never be restored. “The problem is, it is very easy in our current political climate to cut revenue and very hard to increase it,” says Nancy Altman, co-director of the Strengthen Social Security coalition and author of The Battle for Social Security, an excellent history of the program and its politics.

“Look at the controversy over ending the Bush tax cuts, which would only affect a small portion of taxpayers,” Altman says. “In this case, if you propose restoring the payroll tax down the road, you’d have to double the rates on workers making minimum wage. This is being sold as temporary, but it’s not likely to work out that way.”

5 summer tax tips for working teens

By Nancy R. Mandell

University of Massachusetts junior Evan Resnick was thrilled to get a paid summer internship at a medium-sized technology firm on the outskirts of Boston. The 20-year-old computer-science major, who lives in nearby Needham, Massachusetts, is fully aware that the competition for internships — often unpaid — and even summer jobs in the retail and food-service sectors, is fierce. This summer, the number of high school and college students with an internship is expected to outpace the 960,000 who found summer employment last year.

But with a job comes paperwork — IRS forms W4 and W9 that determine how much, if any, of earnings will be withheld as well as an often overlooked but unique opportunity to start lifetime retirement savings with a double tax advantage.

Gina Chironis, a personal financial specialist who is CEO of Clarity Wealth Management in Irvine, California, puts it this way: “Most kids don’t have a clue that if they earn only up to $5,800, they can elect not to have income taxes withheld at all, avoiding the need to file a 1040 next year to in order to recover any refunds due.” The IRS set $5,800 as the standard deduction for a single filer in 2011.

Chironis, a non-practicing CPA who is still seeing the youngest of her four children (ages 17 to 24) through the summer paperwork jungle, insists it is up to parents and their advisers, if necessary, to take responsibility for understanding the consequences of signing on the appropriate line. Without adequate preparation and proper guidance, student workers may lose advantages and savings privileges to which they are entitled.

Time to call in a CPA? Not necessarily. Professional groups like the California Society of Certified Public Accountants offer personal and website guidance designed to understand available tax benefits. Evan was fortunate that his employer emailed him the W4, often a bit baffling to first-time employees, particularly when completing it under pressure in the waiting area of an HR department. (Prospective employees can always ask to take the form home.)

Chose exemptions carefully. The hardest question is the most crucial: how many tax exemptions will you claim? IRS guidelines provided as a worksheet on the first page of the W4 usually work out to only one — the self exemption — or zero for teenagers who generally have no spouse or dependents to claim. Both mean income taxes will be withheld from paychecks, whether they are owed or not