Stimulus pays a few more dollars at payday
By Kay Bell • Bankrate.com

Tax provisions account for more than a third of the $787 billion economic stimulus package, giving millions of taxpayers some sort of tax relief from the first piece of legislation produced under the Obama administration.

First, the good news: The law's cornerstone individual tax break, Making Work Pay, could net each worker as much as $400.

Now for what many see as the not-so-good news: The check is not in the mail.

Unlike last year's stimulus program that produced separate payments, the majority of eligible taxpayers will see the new Making Work Pay credit show up incrementally in their paychecks. As the name indicates, the credit is a version of an Obama campaign plank that seeks to help workers recover some of the payroll taxes drawn from their wages.

It is a credit for up to 6.2 percent of earnings, which happens to be the same percentage an employee pays into Social Security. The maximum available credit is $400 per worker or $800 for working couples who file joint returns. If you earn at least $6,450 but no more than $75,000 as a single filer or $150,000 as a married couple, you will receive the credit.

1. 2 ways to collect
You can collect the credit either by having the amount show up in your paychecks, or by claiming it as a lump sum on the 2009 tax return that you'll file in 2010.

"If you draw a paycheck and have wage withholding, then certainly the easiest away is to simply sit back and let the natural course of things occur," says Mel Schwartz, a partner in Grant Thornton's National Tax Office in Washington, D.C.

"What I've been hearing is that the IRS is encouraging companies to make the changes in payroll," says Mark Luscombe, principal tax analyst with the Riverwoods, Ill.-based tax publishing company CCH. "Since it gets the money into pockets sooner, most individuals probably will prefer the payroll deductions."

The payroll method also should save some federal dollars. Distributing rebate checks last year cost the Treasury more than $40 million.

2. New tables, then what?
The IRS has known that the Making Work Pay credit might be a possibility for months, so the agency had a bit of a head start. Still, companies aren't expected to fully update and implement employee withholding tables until June.

Stay in touch with your payroll office on what you might need to do. In most cases, that means you won’t have to do anything, although some workers might choose to change W-4 allowances in order to get even more in each check, effectively speeding up the pace at which they receive Making Work Pay money.

"You're certainly free to do that," Schwartz says. "But the IRS is probably going to write the withholding tables assuming you haven't done that, so you'll end up with a reduction in withholding greater than the $400 credit. That might not be a bad thing. You'll have reduced the interest-free loan you're going to make to the feds."

But underwithholding also could mean you'll owe more than you expected when you compute your final 2009 tax bill. If your calculations are off too much, Uncle Sam might hit you with an underwithholding penalty, so run the numbers carefully before making any credit-related changes.

3. Midyear start, full-year benefit
If the reduced payroll tax amounts are implemented in early June, workers should see around $13 more show up in their pay envelopes through the end of the year. That would provide for the full $400 to be paid out by the end of 2009.

This credit also is in effect for 2010. With next year's payroll credit adjustments beginning in January, workers should get around $7.50 per week more in earnings.