Paychex Answers Small Business Questions on Stimulus Concerns

April 20, 2009 ( - New tax withholding tables and COBRA changes as a result of the American Recovery and Reinvestment Act of 2009 raise questions for small business owners on how to make changes required under the new law.

Payroll tax experts from Paychex, Inc. have identified six top questions about the law from the company’s small business clients. Paychex selected the questions based on an informal survey of the company’s payroll specialists, who work directly with clients across the country.

According to a Paychex announcement, the questions, and corresponding answers, are:

  1. Should my employees complete a new W-4 to change their tax withholdings? – No, employees do not need to complete a new W-4. The Making Work Pay tax credit is automatic. However, individuals with multiple jobs or married couples whose combined incomes place them in a higher tax bracket may elect to submit a revised W-4 to ensure enough is withheld from their paychecks to cover taxes on the combined income (see W-4 Revisions May Be Needed to Work out Stimulus Credit ).
  2. Will my employees owe money to the government at the end of the year because of the tax change? – People who receive more federal tax credit than they are entitled to will be required to pay it back as part of filing next year’s 1040 personal tax return. Individuals who work multiple jobs or married couples who both work may want to increase the amount of their withholding from one or more of their employers by completing a new W-4 form.
  3. When does the tax credit end? – The Making Work Pay tax credit is for the 2009 and 2010 tax years. As currently written, it will end with employees’ last paycheck of 2010.
  4. Will the credit affect state taxes? – In some states, this federal credit will impact state taxes. Alabama, Iowa, Missouri, and Oregon allow for a deduction in the state withholding calculation equal to the federal income tax amount withheld. So when the federal withholding decreases were implemented, that decreased the state withholding deduction for the employee, which results in an increase in that employee’s state income tax withholding. In Arizona, the withholding calculation is based on a percentage of federal income tax withheld. The federal withholding changes initially resulted in a decrease in an employee’s state income tax withholding. However, Arizona legislators recently passed Senate bill 1185, and on Thursday, April 9, 2009 Arizona Governor Jan Brewer signed the bill into legislation. This bill essentially reverses the decreased withholding effect. Effective May 1, 2009, this legislation adjusts the withholding percentage for the remainder of the year and the first six months of 2010.
  5. How will my employees know if their withholding is correct? – Employees who are unsure whether they are having enough money withheld should refer to IRS Publication 919 at for guidance on tax withholding.
  6. How will my employees get the COBRA credit? – Employers must identify their Assistance Eligible Individuals (AEIs)-those who experienced an involuntary termination between September 1, 2008 and December 31, 2009-and notify them of their right to elect COBRA coverage, as well as the availability of the 65% premium subsidy. The subsidy initially is paid by employers or other responsible entities, that are reimbursed by the federal government (see IRS Posts Added Info about Employer COBRA Tax Break ).

The questions and answers are posted on a section of the Paychex Web site devoted to the stimulus plan, .