Your FICA Savings: 3 Ideas for Your 2011 Increase

By Miranda Marquit, on March 3, 2011

By this point in the year you might have noticed that your paychecks are a little bit bigger. This is because part of the tax package that passed at the end of 2010 was a 2% reduction in the amount withheld for FICA. As a result employees should be seeing a tax break on their check stubs. (The self-employed can take a 2% break  on the FICA as well — but only on the employee side of what they pay; no break for the employer portion.) This provision is meant to take the place of the Making Work Pay tax credit which expired at the end of 2010.

FICA is what you pay into Social Security. Without the Medicare portion of FICA you normally pay 6.2% — up to the first $106,800 of what you make — into Social Security. (Theoretically, at least. We’ll leave the debate over what money actually goes into, and stays, in the Social Security fund for another day.) For 2011 instead of employees paying 6.2% in only 4.2% is paid in. This provides you with an extra little bit of money every month.

Photo by Liftarn via Wikimedia

How much extra money should you see? If you make $55,000 a year you would normally pay 0.062 x 55,000 = $3,410. However, in 2011 you will only pay in $2,310. That means a yearly savings of $1,100. Divided over 12 months you end up with $91.67 every month. That’s not too shabby. The government policy makers who approved this tax break would like to see you spend that money in an effort to boost the economy. However, you might be better off if you use that money to boost your own personal economy.

3 Ideas for Your 2011 FICA Break

While it is tempting to go out and use that extra $91 to buy some video games or a fancy dinner you might consider taking stock of your current situation. This money should be considered a windfall since it is likely to be gone next year. Letting it dictate lifestyle inflation now will only mean a bigger disappointment later, when it disappears, leaving you feeling like you ended up with a pay cut. Here are three things to consider:

1. Add it to your retirement fund: Put that extra money in your retirement account. If you put $1,100 in your retirement account, and it grows at 7% for the next 20 years, it turns into $4,256.65 according to MoneyChimp’s compound interest calculator. However, consider that the money will be combined with your other contributions, and may even boost your employer match — that’s extra free money. This turns your FICA windfall into something even better.
2. Boost your emergency fund: If you are concerned that your emergency fund is running low you could add the extra FICA money to your savings. $1,100 could go toward a month’s rent, to pay for unexpected car repairs, or to buy groceries for two or three months (depending on the size of your family).
3. Pay down debt: Of course if you have debt your FICA money could go toward paying some of that down. Add the monthly increase to your credit card bill payments, and enjoy watching your balance fall at a slightly faster rate. You’ll save money in interest over the long haul, and you’ll be that much closer to financial freedom.

You can probably think of plenty of other things to do with your FICA windfall. How will you use this extra money?

Leave Your Comment (One Comment)

1. Dr. Timothy Lawler says:

   March 3, 2011 at 2:36 pm

   Great freakin’ article! I love people that hit upon the basics. All 3 things that you recommend are awesome! My wife and I are trying to work on #3, paying down debt. Once you have the burden off your shoulders, life seems to get that much brighter. We are also trying to beef up our emergency fund as well. Keep up the great posts!

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