Check Your Withholding

How will the Making Work Pay tax credit affect you?

Most wage earners will benefit from larger paychecks in 2009 and 2010 as a result of the changes made to the federal income tax withholding tables to implement the Making Work Pay tax credit. However, some people may find that the changes built into the withholding tables result in less tax being withheld than they prefer.  

If you're not eligible for the Making Work Pay tax credit, withholding changes could mean a smaller refund next spring. A limited number of people, including those who usually receive very small refunds, could in some situations owe a small amount rather than receiving a refund. Those who should pay particular attention to their withholding include:

• Pensioners (see more information under Pensioners, below)
• Married couples with two incomes
• Individuals with multiple jobs
• Dependents
• Some Social Security recipients who work
• Workers without valid Social Security numbers

The Making Work Pay tax credit, normally a maximum of $400 for working individuals and $800 for working married couples, is reduced by the amount of any Economic Recovery Payment ($250 per eligible recipient of Social Security, Supplemental Security Income, Railroad Retirement or Veteran's benefits) or Special Credit for Certain Government Retirees ($250 per eligible federal or state retiree) that you receive. If you are affected by this reduction, you should review your withholding to ensure that sufficient funds have been withheld to meet your tax obligation. 

If you wind up owing tax because too little was taken out of your paychecks during 2009, you may qualify for special relief on a penalty that sometimes applies.

If you believe your current withholding is not appropriate for your personal situation, you can perform a quick check using the IRS withholding calculator. If you are not familiar with the withholding calculator, watch this IRS how-to video for instructions. When you have determined your correct withholding, make any adjustments by filing a revised Form W-4, Employee's Withholding Allowance Certificate, with your employer. 

Pensioners

Pensioners do not qualify for the Making Work Pay credit, unless they receive earned income. However, because the 2009 and the 2010 withholding tables also apply to pensioners, the IRS has provided pension plans with an optional adjustment procedure. If you are a pensioner with questions about your withholding, contact your pension plan administrator.

If desired, pensioners can adjust their withholding by filing Form W-4P, Withholding Certificate for Pension or Annuity Payments.

Self-Employed

Self-employed individuals can also benefit now from the Making Work Pay tax credit by evaluating their expected income tax liability, allowing for this tax credit if they are eligible, and making the appropriate adjustment in the amount of their regularly scheduled estimated tax payments.

Your 2009 Tax Return

Information on completing your tax return if you're claiming the tax credit is available. To find out if you received a 2009 Economic Recovery Payment, use the Did I Receive a 2009 Economic Recovery Payment? online feature. You also may call our automated telephone service at 1-866-234-2942 and select Option 1 to verify whether you received the payment.

Information for Employers

For 2010: Notice 1036 contains the 2010 withholding tables, which reflect reduced withholding resulting from the Making Work Pay credit. The notice also includes information about an optional procedure permitting administrators of pension plans to offset the withholding reduction.

For 2009: In February 2009 the IRS issued updated withholding tables to help employers implement the withholding adjustments required by the Making Work Pay credit. More details are available in Publication 15-T.

In May 2009, the IRS subsequently issued an optional adjustment procedure allowing plan administrators to offset the February 2009 withholding reduction for some pension recipients.

Questions and Answers

If you have questions about the Making Work Pay provision, these questions and answers  might help.

General Information

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.

For people who receive a paycheck and are subject to withholding, the credit will typically be handled by their employers through automated withholding changes. These changes may result in an increase in take-home pay. The amount of the credit will be computed on the employee's 2009 income tax return filed in 2010 and the employee's 2010 tax return filed in 2011. Taxpayers who do not have taxes withheld by an employer during the year can also claim the credit on their 2009 and 2010 tax returns.

It is not necessary to do anything to get the automatic withholding change. However, an employee with multiple jobs or a married couple whose combined income places it in a higher tax bracket should consult the IRS withholding calculator and, if necessary, submit a revised Form W-4, Employee's Withholding Allowance Certificate, to ensure enough tax is withheld. Publication 919, How Do I Adjust My Tax Withholding? provides additional guidance for tax withholding including a special Making Work Pay worksheet.

Credit:

Internal Revenue Service, "The Making Work Pay Tax Credit"  http://www.irs.gov/newsroom/article/0,,id=204447,00.html?portlet=7 Web 04 November 2010

Qualified Therapeutic Discovery Project Program

This program was designed to provide tax credits and grants to small firms that show significant potential to produce new and cost-saving therapies, support U.S. jobs and increase U.S. competitiveness. Applicants were required to have their research projects certified as eligible for the credit or grant. IRS guidance describes the application process. 

Submission of certification applications began June 21, 2010, and applications had to be postmarked no later than July 21, 2010, to be considered for the program. Applications that were postmarked by July 21, 2010, were reviewed by both the Department of Health and Human Services (HHS) and the IRS. All applicants were notified by letter dated October 29, 2010, advising whether or not the application for certification was approved. For those applications that were approved, the letter also provided the amount of the grant to be awarded or the tax credit the applicant was eligible to take.

The IRS published the names of the applicants whose projects were approved as required by law. Listings of results are available by state.

Learn more by reading the IRS news release, the news release issued by the U.S. Department of the Treasury, the page on the HHS website and our questions and answers.  

Excise Tax on Indoor Tanning Services — First Quarterly Payment Due Nov. 1, 2010

Employer-Provided Health Coverage — Not Taxable; Reporting Requirement Optional in 2011

Starting in tax year 2011, the Affordable Care Act requires employers to report the value of the health insurance coverage they provide employees on each employee's annual Form W-2. However, to provide employers the time they need to make changes to their payroll systems or procedures in preparation for compliance with this requirement, the IRS will defer the reporting requirement for 2011, making that reporting by employers optional in 2011.

The revised Form W-2 for 2011 is now available in draft for viewing. This is the W-2 that most employees will receive in early 2012. The draft form includes the codes that employers may use to report the cost of coverage under an employer-sponsored group health plan.

This reporting is for informational purposes only, to show employees the value of their health care benefits so they can be more informed consumers. The amount reported does not affect tax liability, as the value of the employer contribution to health coverage continues to be excludible from an employee's income, and it is not taxable.

For information, see our news release, draft form and guidance.

Small Business Health Care Tax Credit

This new credit helps small businesses and small tax-exempt organizations afford the cost of covering their employees and is specifically targeted for those with low- and moderate-income workers. The credit is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have. In general, the credit is available to small employers that pay at least half the cost of single coverage for their employees. Learn more by browsing our page on the Small Business Health Care Tax Credit for Small Employers.

Changes to Flexible Spending Arrangements

Effective Jan. 1, 2011, the cost of an over-the-counter medicine or drug cannot be reimbursed from Flexible Spending Arrangements or health reimbursement arrangements unless a prescription is obtained. The change does not affect insulin, even if purchased without a prescription, or other health care expenses such as medical devices, eye glasses, contact lenses, co-pays and deductibles. The new standard applies only to purchases made on or after Jan. 1, 2011, so claims for medicines or drugs purchased without a prescription in 2010 can still be reimbursed in 2011, if allowed by the employer’s plan. A similar rule goes into effect on Jan. 1, 2011 for Health Savings Accounts (HSAs), and Archer Medical Savings Accounts (Archer MSAs). Employers and employees should take these changes into account as they make health benefit decisions for 2011.

For more information, see news release IR-2010-95, Notice 2010-59, Revenue Ruling 2010-23 and our questions and answers. 

IRS partners can spread the word to their clients with the help of a Health Plan Changes flyer and a drop-in article, Does your Healthcare Program need a checkup?

Health Coverage for Older Children

Health coverage for an employee's children under 27 years of age is now generally tax-free to the employee. This expanded health care tax benefit applies to various work place and retiree health plans. These changes immediately allow employers with cafeteria plans –– plans that allow employees to choose from a menu of tax-free benefit options and cash or taxable benefits –– to permit employees to begin making pre-tax contributions to pay for this expanded benefit. This also applies to self-employed individuals who qualify for the self-employed health insurance deduction on their federal income tax return. Learn more by reading our news release or this notice.

Group Health Plan Requirements

The Affordable Care Act  establishes a number of new requirements for group health plans. More information is available on the websites of the Departments of Health and Human Services and Labor and in additional guidance.   

Medicare Part D Coverage Gap “donut hole” Rebate

The Affordable Care Act provides a one-time $250 rebate in 2010 to assist Medicare Part D recipients who have reached their Medicare drug plan’s coverage gap. This payment is not taxable. This payment is not made by the IRS. More information can be found atwww.medicare.gov.  

Additional Requirements for Tax-Exempt Hospitals

The Affordable Care Act adds requirements in the Internal Revenue Code that tax-exempt hospitals must meet to maintain their tax-exempt status. More information can be found in Notice 2010-39, which solicits written comments on the application of the new requirements. Comments must have been submitted by July 22, 2010.

For More Information

For tips, fact sheets, questions and answers, videos and more, see our Affordable Care Act of 2010: News Releases, Multimedia and Legal Guidance page.