Dubbed the "Making Work Pay" tax credit, eligible working individuals can receive a tax credit of up to $400 and eligible working couples can receive up to an $800 credit.  The credit, which began in July 2009, is still in effect for the 2010 tax year. Federal income tax withholdings will be lowered on workers’ paychecks, meaning workers will see about $30 more per paycheck. While the credit is typically handled by employers through automated withholding calculations, if you’re self employed you can still claim the credit on your 2010 tax return, or reduce each of your 2010 quarterly estimated payments by $100. The tax credit is 6.2% of earned income, but not more than $400 for an individual or $800 for a married couple filing a joint tax return. Individuals who earn more than $75,000 and married couples filing jointly who earn more than $150,000 will not be eligible for the credit.

Your maximum Making Work Pay credit may be reduced if you’ve received any amount of Economic Recovery Plan Payment or any Special Credit for Certain Government Retirees, each worth a maximum of $250 per eligible individual. (The Economic Recovery Plan Payment is for recipients of social security, supplemental security income, railroad retirement or veteran’s benefits. The Special Credit for Certain Government Retirees applies to eligible federal or state employee).  If your Making Work Pay tax credit has been reduced because of these additional credits, you must make sure you are withholding enough to meet your federal income tax obligations.

If you end up owing more taxes because not enough was withheld from your paychecks, you could still qualify for special relief. You should also fill out a new W-4 and give it to your employer (or W-4P for pensioners) so that your employer withholds enough for the next tax year. 

If you are an employer trying to look up withholding amounts, you can look to the Notice 1036 which contains the 2010 withholding tables. This notice also includes information about the optional procedure that permits pension plan administrators to offset the withholding reduction of the Making Work Pay credit.

Workers ineligible for the Making Work Pay credit could get a smaller refund in the spring, or even owe a small amount in some situations. According to the IRS, the following groups should pay careful attention to their withholding amounts:

  • Pensioners
  • Married couples with two incomes
  • Individuals with multiple jobs
  • Dependents
  • Social security recipients who still work
  • Workers without valid social security numbers

You can look to the IRS website for more information about this tax credit.