Finance News & Insights

Who Making Work Pay will hurt this tax season

Your Payroll and Benefits team may be dealing with some disgruntled workers come tax time this year.

Some employees didn’t have enough money withheld from their paychecks last year, as a result of the Making Work Pay tax credit.  Result: These employees can end up with either smaller than expected tax refunds — or they could owe the IRS.

Here’s what happened: The Federal tax tables that determine withholding did not account for some of workers whose employment status complicated the tax credit calculation — employees with more than one job, Social Security recipients who still work, etc.

Overall, the Department of the Treasury is estimating that over 10% of taxpayers will end up owing additional taxes.

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  • Christian

    2010 is going generate more questions from workers when they see their taxes withholding increase. Check out this article “Higher Employee Income Tax Withholding in 2010” –
    New IRS 2010 tax tables increase employee federal tax withholding and employer 941 payment liability.
    http://blog.apspayroll.com/

  • Dana

    Taxes can’t get any simpler than mine. I have one job…that’s my total income. No add ons. I file 1040ez. No change in salary for all of 2009. Never owed more than $55 to the IRS in years. And I just found out I owe $453 to the feds this year. I owe more than I got in the tax decrease this year. Something is WRONG!

  • John

    I have already had one disgruntled employee and expect many more. In 2009 2 memos were circulated from my office to explain this eventuality to employees to give them time to check their withholding and submit a new W-4.

    I knew this would be a problem and attempted to be proactive in pointing out the problem to employees.

    Just when our economy needs the boost that tax refunds provide every year…..

  • Richard

    John –

    A tax refund happens when the employer withholds more of the employee’s money for the IRS than he needs to.

    If someone had too little withheld, it may be awkward for them but any benefit to the economy from them having the money to spend has already occurred. A bigger tax refund would simply have been a delay in boosting the economy.

  • John

    Richard –

    As a CPA I understand this concept. And I advise individuals to plan their withholdings so that they either pay come tax time, or receive a small refund.

    However, many people utilize their withholdings as a forced savings. It is their prerogative to do so, even thought in my opinion it is not prudent fiscal strategy. This forced saving that they receive in a refund – used to buy that washer/dryer, refrigerator, vehicle, etc. will not be there to the degree expected – therefore the boost to the economy (your second paragraph is my point exactly).

  • Richard

    John –

    I recognize that people do use withholding as a form of forced saving. I consider it unfair to change the rules in a way that breaks this saving plan for someone who is counting on it. I also understand how hard it can be for many people to write an unexpected check to Uncle Sam on April 15.

    I do not completely follow your economics argument though. Assume I am a person who will spend my take home each week.

    If I over withhold by $20 / week then the money I let Uncle Sam keep is not being spent week by week and whatever boost to the economy my extra $20 of weekly spending would have driven does not occur.

    At tax time I get a large enough refund to buy a new $1040 refrigerator. Does the economy get more benefit from a refrigerator purchase in April 2010 than from the extra $20 every week throughout 2009?

    I suppose the small up tick in sales in Feb-April 2010 for things like refrigerators would be more visible in statistical data than the $20 / week spread over all of 2009.

    I do not quite see how the single refrigerator purchase does more for the economy than seeing a movie one week and going out to dinner another across the entire year. I suppose that if I made refrigerators I would prefer seeing my potential customers loose out on $20 a week so they can buy my product but if I ran a family style restaurant I would prefer they get the $20 each week.

    As neither an appliance maker or restaurant owner, I do not see why I should prefer to see one behavior over the other.

  • John

    Richard –

    You seem to be taking my postscript comment – “Just when our economy needs the boost that tax refunds provide every year…..” and running with it to make some kind of economic argument that avoids the overall point of the “Making Work Pay” policy and its inherent vagueness….

    In my original comment – the point that was being made is that many people were tricked into receiving more in their paycheck at the expense of their ‘expected’ tax refund received upon filing of their tax return.

    Employers are the first agent that these disgruntled individuals turn to – asking why a mistake was made on their federal withholding. When indeed no mistake was made – the federal withholding tables were followed.

    Your point about the timing of the economic impact is valid…..but was not the crux of the comment.

  • Richard

    Fair enough John

    My first post did focus on your last sentence rather than on the body of your note or the article.

    The muck up of peoples withholding is going to be upsetting to many and the employer will bear the brunt of their displeasure. Your reply to my first note was mostly about the impact on individuals and employers and I said I agree on that part.

    You did also mention again the effect on the economy and perhaps I misread your intent. If your comments on economic impact where not intended as a significant part of your message then it has already gotten more than enough attention and we probably mostly agree.

  • I thought this was going to be another long boring blog post, but I was pleasantly suprised. I will be posting a backlink on my blog, as I am quite sure my readers will find this more than interesting.

  • Elaine

    I also know a lot of people that have spent quite a bit during the holiday season thinking they’re going to get a decent tax refund. How many people across the country have thought the same thing. The credit card debt will surely be way up. Hopefully, it won’t be as bad as expected. *crossing fingers*

  • Diane

    I think there will be people who miss taking the $400 credit on their taxes and end up paying it. Will the IRS catch this for 2009? Everyone beware and make sure you take your $400 credit OR $800 for married filing joint.

  • Richard

    Diane

    If someone should take the credit and does not I think it is pretty certain the IRS will catch the oversight and let them know. This is the sort of error they expect and can easily detect with the sanity check software that reviews every return.

    Of course it may take a few months.

    BTW – The story itself is pretty vague. I think anyone who has more than one source of income must assume that withholding will be too low if it is computed by an employer who is unable to take other sources of income into effect. If you are in this situation you already needed to pay a bit of attention.

    If you have one job that pays you $50000 your employer will be able to withhold correctly. If you have two jobs that each pay $25000, both employers will under-withhold, assuming your tax liability is based on $25000. An income of $50000 pays more than 2x the tax an income of $25000 does.

  • Richard

    I did not realize at first just how blatantly misleading the headline is.

    Lets look at a Joe who might represent the guy the headline says is “hurt”. Joe is single and works two jobs that each pay about the same. His tax liability for 2009 would be $5000. If both employers withhold based on what just they pay Joe, they will withhold less than $2500 each. To be sure to cover the $5000, Joe already had to have enough sense to tell at least one employer to do extra withholding. In other words, Joe must be somewhat aware of how these things work or he is already under-withheld.

    With “Making Work Pay”, Joe’s tax liability for 2009 drops by $400 and each employer reduces withholding by $400 because he has no way of knowing about Joe’s second income. Over the year Joe gets an extra $800 in take home but at tax time Joe has a tax liability of $4600 and his withholding has been only $4200.

    Yes, Joe needs to come up with $400 and that might be hard to do. Joe has been hurt by the way withholding worked out. It would be better if Joe had been reminded that because he has two jobs he may need to adjust his withholding.

    Still, Joe has kept $400 more for 2009 than he would have without “Making Work Pay”.

    Is is fair to say the “Making Work Pay” program “hurt Joe”? — NO

    Is it surprising that someone who is mostly interested in taking cheap shots at Obama would spin the story that way? — NO

  • Laura Davis

    My college student (19 yr old) will end up paying because as we claim her, she cannot claim the $400 credit. Her workplace’s payroll told all the student’s working there that they would be fine with single/0 on the W-4’s. I have filled out a new W-4 with extra money taking out for 2010 for her to give to work so she will not have to pay next year. Yes, “Making Work Pay” is hurting some of the people.

  • Deb

    While I expect to get more calls than usual this year, they do come every year placing blame on payroll for not withholding enough. My response is always the same, “I am not a tax consultant and your withholding was based on what you requested on your W-4. If you would like make changes going forward please discuss them with your tax consultant and submit a new W-4.”

    It seems harsh/rude but 95% of the people on our payroll are very highly compensated. What I really want to say is….”with your salary I would hope you’re smart enough to figure this out yourself”

  • Donna

    I was concerned when the new tax tables became available in February 2009. With 90% of staff being Part Time and this a second job, I knew there would be some misunderstandings. I provided an insert with earnings statements to briefly inform staff of the changes and remind them it’s THEIR responsiblilty to check with their tax preparer or http://www.irs.gov to verify annual liability. As Deb indicated, “I am not a tax consultant!” I still had some questions from a few new hires who began employment after my announcement, but for the most part, it worked well.

  • thomas

    Richard-
    I believe you are reading more into the article than is there. The whole purpose of forcing employers to extort money on the government’s behalf is to lessen the realized impact of the tax burden. As such, the government has through the years successfully programmed certain expectations with the average working citizen. The article merely states the tax credit may upset what some have come to expect and is giving a “heads-up” to a possible increase in complaints due to anger towards an outcome different than expected for some people with multiple income streams.

    No where did the article state the taxpayer was hurt. By all accounts, one could read this as employees in the payroll department could be hurt based on the number of increased complaints.

    However, I think it would be fair to say the program “hurt Joe” based on programmed expectations in the workings of the tax system. If, as some have suggested, plans are made according to historical performance of the refund system then changes to expected outcomes would have a negative impact to those plans regardless of prior benefit.

    As to the Obama comment, in my opinion the article implied the makers of the tax tables dropped the ball.

    Addendum: your comments were dated prior to the posting of the article; so, I may not be looking at the same reference material.

  • Richard

    Thomas

    This magazine recycles articles so you should not attach much significance to the date of the most recent reuse. There is even a pretty good chance you will see the article again with a newer dateline and all the comments discarded.

    I grant that it may be fair to say the way the tax tables were handled “hurt Joe” but I do not agree it is fair to imply that the tax credit “hurt Joe”.

    Many of the articles from this publisher attempt to make Obama look like a culprit but Obama was not mentioned by name in this article. So on that point you are correct that I read more into the article than it said.

    It is possible the author intended only to criticize the people who created the tax tables and express sympathy for the payroll people who will take the flack. I do not think that was the only intent of the headline writer.

  • Dan

    Richard,

    I think you may be overlooking people in my situation. I’m a teacher who worked a second job over the summer, as so many teachers do. I remember hearing something about the Making Work Pay tax credit and how people with second jobs “may” be affected, but figured it probably wouldn’t apply to me because my second job isn’t a major source of income – it’s less than 10% of what I make in my full time teaching job.

    So now that I’m filing my return, I find out I owe a substantial amount more than expected, simply because I got a few dollars extra in my pay check every week or biweekly that, at the time, didn’t really help me do a whole lot except think “hmm the last digit of my paycheck is a little higher.” Yes, I know, in theory I had more money every week to stimulate the economy. In practice, I had 3-5 dollars more that wasn’t really enough to change the way I spend or manage my money, and only screws me over now that I owe several hundred dollars more to the IRS that I wasn’t able to fully foresee. And you better believe anything I was going to buy is on hold for a little while now.

  • Richard

    Dan – it is unfortunate that it was not clear to you how the tax credit would interact with your withholding but I think something else must be going on here.

    I do not know how many pay checks you got but lets say that between the two jobs, there were 30 pay checks (two a month as a teacher and six for the summer job). If you really only took home an extra $5 per check then your withholding went down by a total of $150.

    I do not know how much of the tax credit you finally got but even if you were not eligible for a penny of the tax credit, an $150 reduction in withholding could not be the reason you came up “several hundred dollars” short.