The new stimulus package contains hundreds of tax changes. We will spend some time highlighting these throughout the year, but we want to start with an issue that affects employers and employees.

The “Making Work Pay” credit is going to cause a lot of confusion for a lot of people. The idea is that you get up to $400 ($800 married) against your social security tax (6.2% of income). The credit will appear on your tax return in 2010, but you’ll also see a decrease in federal income tax withheld.

This means that if you have net pay of $1000 and usually have $50 of federal tax withheld, you might only have $40 withheld, increasing your net pay to $1010. (For employers, this is an anti-stimulus. Instead of holding onto that $10 for two to six weeks, you’ll have to pay it with each paycheck).

The change in withholding means that the credit will not increase your refund next year. If you reduce withholding by $400 and increase tax credits by $400, the net result is a $0 change in tax/refund due.

Do you have multiple jobs? Be careful! The withholding tables don’t know how many jobs you have. You might see a decrease at each job, even though you only get one credit. Furthermore, the credit phases out if you make too much money; a worker with multiple jobs might have withholding reduced and yet not qualify for the credit to offset it.

For information from the IRS, see this page.

Categories: Tax News and Tips
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