Tax Edge

by Robert Steere, Toolkit Staff Writer

April 1 is implementation day for the Making Work Pay tax credit, and that's no April Fool's joke. The American Recovery and Reinvestment Act of 2009 (ARRA), Congress' most recent effort to stimulate our economy, contains this new tax credit, which will soon affect the operation of your small business because, by April 1, 2009, you must adjust the tax withholding on wages paid to your employees. It also may help you individually because you may be able to take advantage of an income tax credit of as much as $400 ($800 for a married couple) on your personal tax return for the next two years.

The Making Work Pay tax credit served as centerpiece of the tax reduction provisions of the ARRA. President Obama strongly pursued its inclusion in the legislation because it would put money back into the pockets of working people. The annual tax credit (available in 2009 and 2010) is equal to 6.2% of earned income, to a maximum credit of $400 for an individual ($800 for a married couple filing jointly).

Technically, taxpayers will receive the tax credit when they prepare and file their tax returns a year from now for 2009 (and then for 2010 a year later). However, practically speaking, taxpayers that receive wages from employment in 2009 will receive the tax credit in small increments throughout the year. How? The IRS in late February issued a new set of withholding tables structured to informally pay the amount of the tax credit over the course of the year by reducing required withholding amounts on payroll.

And you are expected to implement the new withholding tables in your business before April 1 in order to save your employees roughly $10 per week for the rest of the year (40 weeks x $10 = a $400 tax credit). Make sure you obtain the new withholding tables so that your business properly calculates withholding for your employees. The new tables and instructions are found in IRS Publication 15-T.

Don't forget that you, too, as a business owner, will be able to take the tax credit. If you don't receive a paycheck, you may not see the impact of the tax credit over the course of the year, but you can still take the credit on your personal income tax return based on your earned income from your business - up to $400 if single and up to $800 if married filing jointly.

Beware, though, because the credit is phased out as your adjusted gross income exceeds $75,000 for individuals ($150,000 for married couples filing jointly). If your income exceeds $95,000 ($190,000 for married couples filing jointly), then you will not be able to receive any benefit from the Making Work Pay tax credit.

So don't be fooled. Don't let April 1 pass by without changing withholding tables and saving your employees a little cash each payday.

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Posted March 12, 2009.