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Submitted by H&R Block

Dec. 27, 2012. New Year joy could quickly turn into January sticker shock for taxpayers surprised by smaller paychecks. The end of the 2-percent payroll tax holiday that will make paychecks shrink and the possibility of Federal income tax withholding increasing could potentially impact all employees.

Taxpayers will see a two percent reduction on their paychecks starting in January. For example, workers earning $40,000 (average annual income) will see about $67 less in their monthly paychecks. This is because the Social Security payroll tax will return to its regular level of 6.2 percent, which was last applied in 2010. 

In addition, Federal income tax withholding on wages will increase corresponding to an increase in individual federal income tax rates. The rates are scheduled to increase to 15 percent, 28 percent, 31 percent, 36 percent and 39.6 percent (up from 10 percent, 15 percent, 25 percent, 28 percent, and 35 percent). Increased federal income tax withholding could potentially impact all employees; if so, employee take home pay will decrease. Federal income tax rates are scheduled to increase as a result of the expiration of Bush-era tax cuts. However, the Treasury department may leave rates in place, at least for lower income employees. 

Knowing what will cause the sticker shock can help taxpayers prepare to make January less taxing. Employees may benefit from reviewing Form W-4 to ensure that proper withholding is taking place.