The Making Work Pay Tax Credit

Attention Employers: The IRS has issued updated withholding tables to help you implement the withholding adjustments required by the new economic stimulus law.

More details about the Making Work Pay credit will be available soon in Publication 15, (Circular E), Employer’s Tax Guide.
General Information

For 2009 and 2010, the Making Work Pay provision of the American Recovery and Reinvestment Act will provide a refundable tax credit of up to $400 for working individuals and $800 for married taxpayers filing joint returns.

 

The Making Work Pay Tax Credit

This tax credit will be calculated at a rate of 6.2% of earned income and will phase out for taxpayers with adjusted gross income in excess of $75,000, or $150,000 for married couples filing jointly.

For people who receive a paycheck and are subject to withholding, the credit will typically be handled by their employers through automated withholding changes in early spring. These changes may result in an increase in take-home pay. The amount of the credit must be reported on the employee’s 2009 income tax return filed in 2010. Taxpayers who do not have taxes withheld by an employer during the year can also claim the credit on their 2009 tax return.

It is not necessary to submit a Form W-4 to get the automatic withholding change. However, an employee with multiple jobs or married couples whose combined incomes place them in a higher tax bracket may elect to submit a revised W-4 to ensure enough withholding is held to cover the tax for his or her combined income. Publication 919 provides additional guidance for tax withholding.

 

Key Points of Making Work Pay Provision

  • Workers can receive an income tax credit equal to 6.2 percent of earned income up to a maximum credit of $400 ($800 for couples).
  • The credit could start quickly if implemented through reduced withholding. Otherwise, taxpayers would likely not benefit until they file their tax returns the following year, in which case the stimulus effect would be significantly delayed.
  • Delivery in small increments through reduced withholding—rather than in a lump sum as a tax refund—might encourage recipients to spend the credit rather than save more or pay down debt.
  • A temporary credit induces less additional spending than a permanent credit.
  • The credit could induce some low-income people to work and partially offsets the regressivity of the payroll tax.
  • JCT estimates that the proposal would cost $116.2 billion over 10 years, making it by far the largest tax provision. (If made permanent, the long-term costs would be very large—an estimated $640 billion more through 2018.)

 

How can I check to see if I received an economic recovery payment in 2009?

A. To find out if you received a 2009 Economic Recovery Payment, please call our automated telephone service at 1-866-234-2942 and select Option 1. Or use the Did I Receive a 2009 Economic Recovery Payment? online tool to verify whether you received the payment. Or, you can contact your respective agency for confirmation before completing and filing your 2009 tax return:

  • Social Security Administration: Toll Free number 800-772-1213. General ERP inquiries can be answered by the SSA Web site: www.ssa.gov/recovery.
  • Department of Veterans Affairs (VA): Toll free number is 800-827-1000. General ERP inquiries can be answered by going to the VA Web site: www.va.gov/recovery.
  • Railroad Retirement Board: Go to the RRB Web site at www.rrb.gov/recovery for more details.