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Wage earner's take-home pay shrinks 2% starting today

American Samoa wage earners will receive smaller paychecks in the future, thanks (or, rather, no thanks) to an increase in the federal FICA payroll tax that goes into effect on January 1, 2013.

The take-home pay reduction will equal 2% of a wage earner’s pre-tax income. As an example, someone earning a gross pay of $6.25 an hour will lose $5 a week. ($6.25 an hour is the equivalent of $250 a week or $13,000 a year).

The lost wages will now go to the U.S. government as part of the employees FICA payroll tax.

(Note: The employer’s FICA contribution remained at the same rate of 7.65% while the employees fell to 5.65%. They will now be matching — each at the 7.65% rate.)

FICA taxes are taken out of a worker’s pay by the employer, who then sends the money to the federal government, which uses it to fund Social Security and Medicare. FICA taxes are unrelated to American Samoa income taxes, which are also taken out of a worker’s pay.

Income taxes are sent by the employer to ASG, and are reconciled on an annual basis when the employee files his/her form 390 annual tax return.

THE BACKGROUND

After the U.S. fell into recession in 2009, the Obama administration and Congress agreed to reduce FICA taxes by 2% for two years in order to put some spending money in the pockets of the American public, in the hope that it would lead to a stimulated economy.

The FICA tax reduction (from 7.65% of employee’s gross pay to 5.65%) was financed with federal borrowing that took the nation further into debt. The reduction was always intended to be a temporary measure. The temporary measure expired on December 31, 2012, and the FICA payroll tax is now back to 7.65%.

In the meantime, the local Fono passed a tax measure in 2011 with the following logic: although Uncle Sam just gave you a 2% payroll boost, the ASG is really hurting and so ASG will replace the 2% tax break extended by Uncle Sam with a 2% tax increase that goes to ASG. You employees will get the same pay as you got before, because the tax we are imposing in American Samoa is the same size as the tax break given by Uncle Sam.”

Originally, the Fono scheduled the new 2% ASG wage/payroll tax to last just for one year (2011), but in the early part of 2012, the Fono made the ASG 2% wage/payroll tax permanent.

Because it is a wage tax, the 2% tax is only paid by local employees. In other words, it is not a 2% increase in the local income tax, which would have to be paid by all tax filers regardless of their source of income (e.g., rent, business profit, dividends).

Low-income wage earners, who are the vast majority of the taxpayers in American Samoa, used to be subject to the federal payroll tax and the local minimum income tax of 2%.

In the past ten years, low-income wage earners have seen the local minimum income tax increased to 4% and the adoption of the new 2% ASG wage/payroll tax.

On the other hand, federal child tax credits have been extended to American Samoa during that same period, and they often exceed the increase in local taxes. Whether or not the federal child tax credits have gone the way of the 2% federal FICA payroll tax is unknown, at this time.

Samoa News will keep a running update on the fiscal issues, as they effect the territory. In the meantime, the US Congress and President Barack Obama continue to wrangle on a deal that both Democrats and Republicans say is just around the corner.



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