Issued: 02/27/2009
Subject: Payroll
Topic: Economic stimulus credit issued through change to Federal income tax withholding tables

Background:
The American Recovery and Reinvestment Act of 2009 created a refundable tax credit referred to as "Making Work Pay". However, instead of the IRS issuing a one-time stimulus payment directly to the taxpayer, they have issued new federal withholding tables to be implemented by employers as soon as possible but not later than April 1, 2009. This will allow the benefit of the provision to be spread out over the course of the year by effectively reducing the federal income tax withheld from the paycheck. Eligible taxpayers will still be required to make the claim for the credit when they file their personal income tax returns at the end of the year.

Effective date of tax withholding changes at IU:
Indiana University implemented the federal withholding table changes the afternoon of February 23, 2009. We use "Table 7" on page 3 of the federal withholding tables to determine the amount of tax to be withheld. Generally, this will result in an increase to an employees' net take-home pay beginning with the biweekly paycheck to be issued on March 6th and the monthly paycheck to be issued on March 31st. Any online checks issued after 2 PM on February 23rd will also be impacted.

What does the change in withholding tables mean to an IU employee?
The purpose of the change to the withholding tables is to allow taxpayers to receive the benefit of this new credit during the course of the year by reducing the amount of federal income tax required to be withheld. This will result in a larger take-home pay. Withholding tables, in combination with an accurately completed W-4, are designed to withhold the proper amount of tax to match the tax liability of the taxpayer.

Many higher-income taxpayers will see little or no change in their take-home pay. This is because the eligibility to claim the credit is phased out at the higher income levels and the withholding tables have already taken that into consideration. Visit the IRS website for more information about who is eligible and details about the income phase-out levels.

An employee has received the benefit of this credit through a reduction in federal income tax withheld on their paychecks and wants to know if they will owe it back to the government at the end of the year when they file their personal income tax return.
Generally, no. Take an example of an employee who accurately estimates their 2009 federal income tax liability to be $3,000. Assume the employee had a W-4 on file at the beginning of 2009 that would result in withholding of exactly $3,000. Due to the withholding table changes, the actual amount withheld during the year is $2,600. Assuming this individual is eligible for the "Work For Pay" credit, they will claim the $400 credit on their tax return. The result is $0 tax due because the $3,000 tax liability is offset by the $2,600 in tax withholding plus the $400 tax credit. This example is extremely simplified for purposes of demonstrating that the reduction in federal income tax being withheld throughout the year will be applied by claiming the credit on the income tax return.

Do employees need to be concerned about under-withholding?
In some cases, yes. There are a few groups of employees that will generally not be eligible to claim the credit on their income tax return but they may receive the benefit of the credit due to the modified tax withholding tables. A nonresident alien or an individual that may be claimed as a dependent on another taxpayers' return may not be "eligible" individuals.

Eligibility to claim the credit is also phased out at certain income levels. The new withholding tables are designed to eliminate the benefit from being given to an individual with an income level that would result in exceeding the phase-out amount. However, the withholding tables can only be applied to the income being paid by IU to that employee. An employee could receive the benefit of the credit based on their earnings level at IU but may not be eligible to claim the credit on their tax return when their income is coupled with the income of a working spouse or earnings from a second job outside of the university. For example, an IU employee with annual earnings of $35,000 would potentially receive the benefit of the credit on their paychecks through reduced withholding because their income is not high enough for the credit to be phased out through the withholding tables. This same employee has a spouse with annual earnings of $200,000 either at IU or with another employer. When filing a joint income tax return, the combined annual earnings exceed the threshold so the amount of the credit is phased out to $0.

Therefore, it is possible for employees in these situations to find themselves under-withheld if no action is taken.

How does an employee know if they will be under-withheld?
Employees are responsible for monitoring the amount of income tax being withheld from their paychecks in comparison to their anticipated tax liability that will be calculated when they file their personal income tax return. Indiana University employees are not permitted to provide personal tax advice or assistance in determining what amount of tax needs to be withheld. IRS Publication 919 provides additional guidance for tax withholding. Publication 919 has not been updated for use in preparing 2009 tax returns as of the date of this important notice. Employees are encouraged to review this publication periodically for additional guidance in projecting their tax for 2009.

How does an employee request additional federal income tax to be withheld from their paycheck?
If an employee determines that more federal income tax withholding is necessary, the employee can submit an electronic Form W-4 through the Employee Self-Service section of OneStart. The W-4 allows an employee to elect a specific dollar amount to be withheld in addition to the regularly calculated withholding amount. This additional amount will be withheld on every regular paycheck issued until another W-4 is submitted to modify the withholding amount.

Comments or questions relating to this notice should be directed to the FMS Taxpayer email account.