Refunds may be smaller this year for some people, and paychecks will definitely be smaller in 2010 than in 2009, because of the Internal Revenue Service's withholding calculations for the Making Work Pay Credit. Last year, the IRS issued revised withholding tables after the passage of the American Recovery and Reinvestment Act of 2009, that were meant to reflect the Making Work Pay Credit, but their calculations were flawed because they did not take into account people with more than one job, or married taxpayers with both spouses working, or those who were receiving Social Security benefits while also earning taxable wages. Individuals in these groups may not have had enough money withheld from their paychecks, and may see smaller refunds this year.
And for 2010, withholding tables call for more money to be withheld, in part because the Making Work Pay Credit withholding now applies to a twelve-month period. Last year, employers were required to introduce the withholding by April 1, so the withholding adjustment was for nine months only. The IRS has a video on YouTube explaining this.
Taxpayers must file Schedule M, Making Work Pay and Government Retiree Credits, which calculates the amount of credit they taxpayer may claim – 6.2 percent of their wages up to $400 for individuals and $800 for married filing jointly -- with their 2009 returns to claim the credit.
The Making Work Pay Credit, like the Earned Income Credit, is fully refundable. For most people who file with Schedule M, the credit will help to offset the lowered withholding.
In addition to workers who benefited from lower withholding, more than 50 million Social Security recipients received payments of $250 from the economic stimulus as a comparable, immediate source of cash. But many of the retirees who received the $250 may also have received the credit because they were working and their withholding was adjusted. Retirees who were working when they received the $250 stimulus must deduct that amount from their claim.
Bobby Singletary, a Certified Public Accountant in Hamlet, Virginia, says the Making Work Pay Credit is complicated and recommends "trying to get across that you're talking about $400 maximum per individual and $800 on a joint return, and that you should just be aware that because of this law you might end up owing a little more or getting back a little less and just be prepared for that", the Richmond County Daily Journal reports.
In November, the Treasury Department inspector general estimated that 15.4 million tax filers overall may have received more of the Making Work Pay credit than they should, CNNmoney reported. The IRS, in a written response, disputed the inspector general's estimates, saying that the majority who might be affected by underwithholding would see less of a refund but would not have an out-of-pocket tax liability come April 15.
On several occasions in 2009, The IRS urged taxpayers to check their withholding and if necessary, file a new W-4. In November, they suggested that people in the following categories, some of whom are not eligible for the Making Work Pay Credit, review their W-4 allowances
- Pensioners (see more information under Pensioners, below)
- Married couples with two incomes
- Individuals with multiple jobs
- Some Social Security recipients who work, and
- Workers without valid Social Security numbers