	Introduction

For many individuals, the amount being withheld for federal taxes from their paychecks or pension payments in 2011 is larger than it was in 2010. This report is intended to help Members of the 112 th Congress and their staff respond to taxpayer inquiries by examining the reasons for the changes in withholding. It begins with a brief description of the current system for federal withholding from wage and pension income and then assesses the effects of two federal economic stimulus measures on withholding amounts: the Making Work Pay tax credit (MWPTC) that was available in 2009 and 2010 and the Social Security tax reduction for employees and the self-employed in 2011 that replaced the credit. The assessment includes a comparison of their average benefits by income level and their cost-effectiveness in promoting growth in national income and employment. Not all income payments are subject to withholding. Employers also have the option of combining the amounts to be withheld for the income tax and the employee's share of the Social Security and Medicare hospital insurance taxes. Making Work Pay Tax Credit and Federal Tax Withholding in 2009 and 2010

A key element of the first economic stimulus bill (the American Recovery and Reinvestment Act of 2009 or ARRA, P.L. 111-5 ) passed by the 111 th Congress in February 2009 was a temporary refundable tax credit (IRC Section 36A) designed to benefit low- and middle-income households. Known as the Making Work Pay Tax Credit (MWPTC), it was equal to the lesser of 6.2% of a taxpayer's earned (or wage) income or $400 for single filers and $800 for married couples filing jointly (even if only one spouse has earned income) in both 2009 and 2010. The credit was subject to two significant limitations. First, it was reduced by the amount of any economic recovery payment or refundable credit received by an eligible taxpayer as a result of ARRA. Second, the MWPTC was reduced by an amount equal to 2% of a recipient's modified adjusted gross income (MAGI) in excess of $75,000 (or $150,000 in the case of a joint return). After the credit became available, nothing was withheld from the biweekly paychecks of the same individuals, increasing their take-home pay by about $15 for single filers and $19 for married individuals filing jointly. Congress allowed the MWPTC to expire at the end of 2010. In its place, it established a temporary payroll tax cut for employees and self-employed persons, as part of the Tax Relief, Unemployment Compensation Reauthorization, and Job Creation Act of 2010 (TRUCJCA, P.L. 111-312 ). As with the MWPTC, the temporary Social Security tax reduction is intended to boost spending by low-to-middle-income households. Unlike the credit, however, the payroll tax holiday has immediate benefits for workers at the bottom of the wage scale, since the first dollar of annual wages is subject to the payroll tax but exempt from the income tax. The payroll tax holiday also raises the take-home pay of some of the workers whose wage income was too high to benefit from the MWPTC. Changes in Federal Tax Withholding in 2011

As a result of ARRA and TRUCJCA, many taxpayers have experienced a change in the amount withheld for federal taxes from their paychecks or pension payments in 2011. The expiration of the MWPTC, combined with the implementation of the Social Security tax reduction for employees, has altered the formulas used to determine how much to withhold.
Over the first few weeks of 2011, many employed, self-employed, and retired individuals from the public and private sectors discovered that the amount withheld from their paychecks and pension payments for federal income and employment taxes was larger or smaller than the amount that was withheld in 2010.
This report is intended to help Members of the 112th Congress and their staff respond to questions from constituents about the reasons for the withholding changes. It examines the two main reasons for the changes: the Making Work Pay tax credit (MWPTC) that was available in 2009 and 2010 and the Social Security tax reduction for employees and the self-employed that is available in 2011. The report also compares the average benefits of each stimulus measure by income level and assesses their cost-effectiveness as tools for promoting growth in national income and employment.
The MWPTC was included in the first economic stimulus bill passed by the 111th Congress (the American Recovery and Reinvestment Act of 2009 or ARRA, P.L. 111-5). It was intended to boost the after-tax income of low- and middle-income households. The credit was refundable and equal to the lesser of 6.2% of a taxpayer's wage income or $400 for single filers and $800 for married couples filing jointly in 2009 and 2010. It was subject to two limitations: (1) the credit was reduced by the amount of any economic recovery payment or refundable credit received by an individual under ARRA, and (2) it was reduced by an amount equal to 2% of a recipient's modified adjusted gross income in excess of $75,000 for single filers and $150,000 for joint filers. Congress designed the credit to be disbursed in small increments through reduced withholding. As a result, take-home pay for eligible single and joint filers was somewhat larger each payroll period in 2009 and 2010 than it otherwise would have been.
The MWPTC expired at the end of 2010 and has not been extended. In its place, through the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (TRUCJCA, P.L. 111-312), Congress established a reduction in the employee's share of the Social Security tax from 6.2% to 4.2% for 2011 only. The reduction also applies to Social Security tax paid by self-employed individuals. Like the MWPTC, the payroll tax holiday is intended to raise spending by low- to middle-income households by increasing their take-home pay each payroll period. Unlike the credit, however, the payroll tax holiday grants immediate benefits on workers at the bottom of the wage scale and raises the take-home pay of some of the workers and self-employed persons whose earned income was too high to benefit from the credit.
Because of ARRA and TRUCJCA, many taxpayers are experiencing a change in the amount withheld for federal taxes from their paychecks or pension payments in 2011. The expiration of the MWPTC, coupled with the implementation of the temporary payroll tax holiday for employees and the self-employed, has altered the formulas used to determine withholding. Consequently, employees and self-employed individuals with gross earned incomes below $20,000 will be worse off in 2011, whereas those with incomes above $20,000 will be better off. At the same time, many retired persons living off pension benefits alone are likely to experience a rise in federal withholding amounts, since their pension payments are subject to the same federal withholding tables as earned income.