Making Work Pay: Check Your Withholding

Recently, the Making Work Pay tax credit was passed as part of the economic stimulus package. The credit was supposed to go into effect on April 1. Here is what the IRS says about the credit:

In 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 up to $800 for married taxpayers filing joint returns.

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

What many people don’t think about, though, is how they’re withholdings might be affected in two income families, or for those who are self-employed. Here are some things to keep in mind when you look at your pay increase:

1. Double withholdings for two incomes?

In many cases, your employer will look at your withholding information on the W-4. If it shows that you have a spouse, then your withholding will likely be adjusted to reflect the full $800 you are entitled to, spread out. You spouse is likely to run into the same issue. This means that you could have double the withholding, leading to you owing money on your taxes. Check with your HR department, and with your spouse’s, to make sure withholdings are in proper order.

2. Self-employed tax credit for Making Work Pay

If you are self-employed, you have two options for claiming your Making Work Pay tax credit: You can adjust the amount you pay for your estimated taxes quarterly, using IRS Publication 15-T; or you can wait until you have your taxes prepared next year and have the credit applied then. Of course, if your spouse works, you might already be seeing the benefits. Make sure to double check what is being withheld.

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