Why Your Paycheck May Be Smaller This Month

In this video, the host explains why paychecks may be smaller in January 2025 compared to December 2024. 

The main reason is due to the resumption of Social Security deductions at the start of the year, which cease once annual income exceeds $176,100. This deduction affects high-income earners significantly, making their early-year finances feel tighter. 

The host provides tips on managing cash flow and planning financial contributions around the timing of these deductions, ensuring viewers have clarity on the finances to make informed decisions.

Transcript

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SPEAKER_02 0:00

Knowing this in advance is gonna help, right? You're not gonna be as hard on yourself, you're not gonna be thinking that you're messing up, you're way overspending. Because we know the reason why it's tighter is because of Social Security being on there and that will fall off towards the end of the year. This is Techie Personal Finance Bootcamp where I help tech professionals in their 20s and 30s balance a great life today without sacrificing their future possibilities. I'm your host, Lucas Caceres, certified financial planner and founder of Level Up Financial Planning, where I help educate, coach, and build strategies with my clients to help them take their financial confidence to the next level.

SPEAKER_01 0:36

Disclaimer, alert. This information is for education, so don't just go use it. First consult with your financial advisor, because that's way more legit. That's it.

SPEAKER_02 0:45

That was Orlando Gomez, and you can catch him in season three, episode four, on how he broke into tech by writing a jingle. Hello, thank you for joining Techie Personal Finance Bootcamp and welcome to 2025. I'm gonna try to push out more content this year than I did last year. Last year with the folks were on balance and just kind of making sure I was there for my family, making sure as they're on the weekends and kind of freed up for that. Got that all logistically settled down, and I'm excited to uh focus on creating more content because I know there's a lot of folks out there who don't necessarily want to work with a financial planner. They don't want to share these types of details with someone else. I know it's sometimes goofy to talk about. And then also a lot of these are made, quite honestly, for my existing clients where hey, we meet pretty often, but there's some nitty-gritty details that I do kind of go over those with those, with you guys, but I know it's hard for you to remember those things. Maybe it's relevant, but it's not something that we need to tackle right now. So I can send off these short little podcast episodes for you to check out too. So lots of benefits for that's why I enjoy doing it. That's why it's gonna be a priority of mine to kind of keep pushing these things out. Today I'm gonna be talking to you about why your paycheck might be smaller this month in January 2025 than it was in December 2024. And one thing that I started realizing pretty quickly is folks don't realize as they're jumping up these different income tax brackets that there's other things that go on. It's not just tax brackets changing, but another thing that happens as your income increases is you stop paying into Social Security. And so the reason why your paycheck might be getting smaller in 2025, at least the first few months of the year, is because at the end of 2024, if your income exceeded $168,600, then that meant that you stopped paying into Social Security at some point. So if you cross that threshold in June, well, you weren't paying Social Security the other half of the year. If you stopped paying in October, November, well, you had a month or two where you weren't paying into Social Security, which is 6.2%. And we're talking about larger annual salaries. So 6.2% is definitely noticeable. And what I was seeing from good clients every January, every February, it's like, hey, I don't know. I don't think I changed much, but things just feel tighter. And so that's where I've been focusing the last couple of years on letting folks know that hey, if your income is this high, the reason why it feels tighter is not because you're spending more money. It's not necessarily because of inflation, although that was a huge issue a couple years ago. It is because your income is just too high, which is a good thing because Social Security does fall off. But come January, everything has to get reset up and repaid. And for 2025, that new salary amount that you need to surpass before you stop paying in Social Security is going to be $176,100. So once you've crossed that threshold in 2025, you'll see Social Security fall off. This will happen towards the end of the year if your income's just over that amount. If your income's double that, then it'll fall off around summertime. And if that's any bonuses you receive, that's commissions if you're kind of sales-based or receive any type of stuff like that. If you exercise stock options, that also counts towards it, as well as your RCUs that vest. So as you receive those RCUs, they count as income. Social Security taxes get withheld on that until your income crosses that threshold. And so those are typically the big things that you'll see count towards it. Every now and then I'll have clients that kind of transition between different jobs and different employers throughout the year. And they're like, wait, I already passed the limit. How come my new employer is withholding that social security? And the good news is you're going to get that refunded back to you come tax season. But the the bad news temporarily is, well, your new employer doesn't know what was actually withheld. They don't know what your paycheck was, and they're not going to do the additional work to kind of figure that out. And so they're obligated by the IRS to withhold Social Security on you. And when you file your taxes that following year, they'll say, hey, you already maxed it out with this one employer. We saw that you paid Social Security again with the new employer. This is how much you're getting additionally refunded back. So don't worry about it. Change employers does not mess this up. It just means that they'll withhold more than they need to in Social Security with the new employer, and then you'll get that refunded back as long as your income is exceeding that $176,100 for 2025. Another question I get about Social Security and that limit is well, me and my spouse, we both combined make over that limit. That doesn't count. It's based on the individual. So Social Security is individually based. It doesn't matter if spouse's income gets added to yours, and then you pass that limit. It's really going to be a look at your single self, your social security numbers, what they're going to be taking a look at there. So important to be aware of. And now a quick message from our nonprofit sponsor, Tech by Choice.

SPEAKER_00 5:40

Tech by Choice is a nonprofit that's focused on helping underrepresented groups understand Thrive and Tech. Our main goal is to be a community that you don't need a code switch in in order to learn what you need to thrive in tech. And so we do workshops for skill building. We talk about financial literacy. We also talk about mental health and what to do if you run into discrimination in the workplace. Any donations, if you go to techbychoice.orgslash donate, you'll get all of the details on how you can give to the organization. Things as little as like five dollars really help us go. The other way that you can get involved and help tech by choice is to volunteer. We are always looking for mentors and we're looking for people to help out with some of our resume review events and just supporting the community by even joining and answering questions in our Slack is always really helpful. And then if you have any connections for us to get those sponsorship deals and then larger companies and get out there and the tech streets, I'm always open to that as well. So there's a lot of different ways to help.

SPEAKER_02 6:50

There's some fun planning opportunities that come from this. And so just knowing this in advance is gonna help, right? You're not gonna be as hard on yourself, you're not gonna be thinking that you're messing up, you're way overspending, because we know the reason why it's tighter is because of social security being on there and that will fall off towards the end of the year. So some of the things that my clients will do is we'll plan out, well, when does Social Security fall off? That might be when we try to catch up on making 401k contributions, if we're trying to max that out or just increase that contribution that you're doing. There's also things that you could do towards the end of the year once social security falls off. Like if your employer offers a great employee stock purchase plan with a discount, that might be worth optimizing and kind of funneling more funds into towards the end of the year once the funds are available, once social security falls off. Build up emergency savings, use it for end-of-year travel, or maybe just holidays and gift given. So there's things where it's like, hey, things are gonna be tighter now. If we know some expenses and some major stuff is gonna come up towards the end of the year, that's where we can use these extra funds at the end of the year to match it up. So we're not overly stressed out and out because we're aware we have the clarity and understanding that hey, this is gonna be what it is. We know when it's gonna fall off, and we know what we can do with it to make sure that we don't just spend that money on frivolous things because you're it you are gonna feel more lush, it's gonna feel more uh cash flow heavy coming in towards the end of the year once social security does fall off. And we want to be intentional with it and make sure we're using it the right way. Those are the big tips I wanted to get out of the way, wanted to make sure you're aware of it, wanted to let you know that hey, you're not messing up your finances, you're not messing up your budgeting. It just is gonna be tighter this time of the year. If you have any questions about that, if you need help kind of forecasting when your social security will actually fall off, we can play around in Excel and kind of quickly find out what that is for you. If you're an existing client, we're gonna do those tax projections for you. I just need your two most recent pay stubs, and I can project that out as well as stock options stuff if you receive new grants that I'm not aware of. So these are all of the things that go into the puzzle of seeing well, how are your finances and cash flow gonna work this year? Social Security falling off definitely has a big impact. So good, good planning opportunity, good thing to get your head wrapped around and understand a little bit more. And if you have follow-up questions, definitely reach out and let me know. Thanks for joining me today. And yeah, I think for the rest of the year, we're gonna try to do these quicker, smaller bite-sized things, not the 15, not the 25, not 30-minute financial topics, hopefully less than 10 minutes. Thanks for joining me and let me know if any questions come up, if there's future topics you want me to tackle, I would love to help. Nonprofit sponsors were provided ad space at no charge. I think they're awesome and wanted to provide them a platform to spread awareness about the great work that they do. Thank you so much for listening to Techie Personal Finance Bootcamp. You can find show notes by visiting local financial planning.com and finding the podcast page. You'll also be able to find strategy guides, videos, and cheeks to help you take your financial confidence to the next level. If you feel this episode has added a ton of value for you, please rate and share this with friends and colleagues. Catch you next time on Techie Personal Finance Bootcamp.