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February 2010 - 2009 Making Work Pay Tax Credit

February 2010:

2009 Making Work Pay Tax Credit

With tax season here and preparation of income tax returns underway, some employees are surprised to find that they are getting smaller than expected refunds and, in some cases, owe taxes to the State of Minnesota and/or the IRS. As some of you recall, in early 2009 congress passed the Making Work Pay Tax Credit setting forth a reduced federal withholdings schedule for employees’ paychecks. There was, however, no corresponding income tax rate decrease. Outside payroll vendors applied the reduced withholdings, in some instances without providing notice to employers and/or employees. Employers were required to implement the new withholding rates no later than April 1, 2009. Taxpayers can refuse the credit by adjusting their W4s. The Making Work Pay Tax Credit was a provision of the American Recovery and Reinvestment Act.

Apparently, the government was trying to spur spending and provide a positive nudge to the economy. The reduced withholdings afforded employees greater take home pay, due to the reduced income tax withholdings. As a result of the reduced income tax withholdings from employees’ paychecks, many employees may experience a smaller than expected refund or end up in arrears in 2009 income tax payments.

IN CASE YOUR EMPLOYEES ASK OR COMPLAIN ABOUT THEIR TAX SITUATIONS.

As this reduced tax withholding will continue through 2010, now might be a good time to encourage employees to review W-4 withholdings for 2010 and consider making adjustments to try to avoid any income tax shortfall when filing 2010 income tax return. Employees always can request, via a W-4, to increase the level of withholding from their paychecks. Blank W-4 forms are available on the IRS website at http://www.irs.gov/pub/irs-pdf/fw4.pdf.

For more information on the Making Work Pay Tax Credit, go to the IRS website at http://www.irs.gov/newsroom/article/0,,id=204447,00.html.

Keep in mind that while E&U can assist employers and employees with employment law issues, we also assist individuals and businesses with tax disputes. If you have any question on this or any other work or tax-related issue, please feel free to contact us.

Sheila Engelmeier, Esq.

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D: 612.455.7723

Ivory S. Umanah, Esq.

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D: 612.455.7726

Sue Fischer, Esq.

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D: 612.455.7727

Charlie Firth, Esq.

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D: 612.455.7724