W-4 Revisions May Be Needed to Work out Stimulus Credit

March 26, 2009 (PLANSPONSOR.com) - In February, the Internal Revenue Service released new withholding tables that incorporate the new "Making Work Pay" credit - a provision of the American Recovery and Reinvestment Act of 2009.

In its announcement, released with the tables, the IRS asked employers to start using the new withholding tables as soon as possible but not later than April 1, and said workers will not need to fill out a new W-4 withholding form to get the credit (see IRS Releases Tax Withholding Tables to Reflect Stimulus Bill Provision ). However, tax analysts at Thomson Reuters point out that IRS Publication 15-T included a notice for employers to distribute to employees concerning the changes in income tax withholding, and certain employees (e.g., an employee with more than one job, or an employee who is married with combined income that will put him or her in a higher tax bracket) are advised in the notice that they may need to file a new Form W-4 with their employer because the amount of the withholding tax reduction could be significantly different than the credit that they can claim on their 2009 personal income tax return.

The analysts at the Tax & Accounting business of Thomson Reuters provide some sample calculations in which it is assumed that the employee is paid weekly and that the new withholding tables will be used for 40 weeks in 2009. All of the calculations use the percentage method under the new withholding tables and those that were in effect before enactment of the 2009 Recovery Act.

The sample calculations include:

  • Lower Paid Employee, One Job Only: An employee who is single, claims one withholding allowance, and makes $45,000 a year will see a $10.20 increase in his take-home pay. That works out to $408 for the balance of the year, slightly more than the $400 MWPC credit he will be entitled to when he files his 2009 return.
  • Employee With Multiple Jobs: The employee in the previous illustration also has a part-time job paying $15,000 a year, and he also claims one withholding allowance at this job. His weekly take-home pay at the second job will increase by $8.70, or $348 for the year. The employee’s total withholding will be reduced by $756 ($408 for the main job, and $348 for the second job), but he will only be able to claim a $400 credit on his personal income tax return. As a result, the employee may want to consider filing a new Form W-4 to have more withholding taken out of his pay.
  • Higher Paid Employee, One Job Only: A married employee earns $100,000 a year at one employer and claims four withholding allowances. His wife is a homemaker. This employee will see a $15.35 increase in take-home pay, or a total of $614 extra for the year, even though he will be able to claim a full $800 MWPC credit on the 2009 return.
  • Working Couples: A married couple who each earn $75,000 a year each claim two withholding allowances. Each spouse will receive a $614 withholding tax reduction. Their combined withholding reduction will be $1,228, but the maximum credit they can claim on their 2009 personal income tax return is $800. One or both of these individuals may want to consider filing a new Form W-4 to increase withholding.
  • Joint Filers With Only One Earner: A married couple earns $150,000, all of it generated by the wife, who claims four withholding allowances. The couple receives $5.39 extra each week ($215.60 for the balance of the year), even though they may claim an $800 credit on their 2009 personal income tax return (assuming their modified AGI doesn’t exceed $150,000). The working spouse may want to consider submitting a new Form W-4 to reduce withholding.