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Paycheck Chronicles

Why Withholding Will Go Up This Year

Warning:  paycheck info ahead, and it might a little confusing.  Get a cup of coffee and work through this with me so that you understand what is happening.  Because this is complicated, I am going to give you the short version and the long version.

Short story:  There was a tax credit for 2009 and 2010 that expired.  For 2011, you will have more taxes taken out of your paycheck each month.

Long story:  In 2009 and 2010, Congress authorized a tax credit called the Making Work Pay Credit.  Instead of sending out stimulus checks (as in 2008), it was implemented as a credit on your income tax return.  There are two usual ways that credits get dealt with:  either you get a larger refund  (or owe less) when you file your tax return, or you adjust your withholding so that you don't have as much held out each paycheck.  In the case of the Making Work Pay Credit, the government tried to make it easier for citizens by instructing employers to withhold less each paycheck without the employee having to make any changes.  This was a nice idea because it meant you got more money each paycheck instead of getting a larger refund (or owing less) without having to make any changes to your W-4 withholding instructions.

The Making Work Pay credit expired at the end of 2010, so withholding is going to go back to it's previous levels.  This means that you will have more federal income tax held out of your paycheck each month.  The amount is based on your income, but the maximum difference should be around $66 per month.

There is a new version of the stimulus this year, called a payroll tax holiday.  Instead of giving a tax credit, the federal government will be taking out less money for Social Security and Medicare (the "payroll" taxes).  For most people, the 2011 payroll tax holiday will be more benefit than the 2010 Making Work Pay Credit, so they will end up with more money in their paychecks.  However, when you look at your LES or pay stub, it will look different.  You'll find you are having more federal taxes withheld, but less in Social Security payroll taxes.

If you find that you owe too much each year, or you are getting a big refund, be sure to adjust your withholding to get closer to balancing your withholding and your tax liability.  You will find lots more useful information in these articles:

What Is Income Tax Withholding and Why You Want To Get It Right

Calculating Your Withholding

Understanding Income Taxes

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