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

About the Author

Kate Horrell
Kate Horrell is a military financial coach, mom of four teens, and Navy spouse. She has a background in taxes and mortgage banking, and a trove of experience helping other military families with their money. Follow her on twitter @realKateHorrell.
  • sybil angelley

    everyone was talking about the increase in everyones paycheck and what a joke. my take home pay is less than it was. what a disappointment. the news media said nothing about the increase in the federal tax increase. the
    older people who are working for living below the provery level will never see a break until the federal employees start living by the same stantards the average citizen has to live by.

    sybil angelley

  • ron

    The whith holding table allows you to take more money home at payday but if the tax table isn’t changed you pay it all back at tax time. Big joke on you… I called the IRS and the tax table wasn’t changed.

    • KateKashman

      Ron, it sounds like you may have more information. What can you share? Yes, the tax tables have not changed. The Making Work Pay credit has expired, meaning that you will owe more at the end of the year, and thus the temporarily lower withholding has changed back to the pre-Making Work Pay levels.

      The payroll tax holiday is effectively a lower tax on your pay. It is not an income tax so it does not have anything to do with the tax tables. The two percent less in payroll taxes does not have any impact on your tax return (except in crazy rare circumstances where the amount of payroll tax you pay impacts your ability to take certain credits.)

      The way our current tax system is structured, the credits often mean much more than the tax tables and thus the changes this year will impact everyone.

  • Nola

    When the ones who make the laws start being treated the same as the rest of us then we may see some improvement…but that will never happen

  • teacher101

    it certainly didnt’ help me! I am a teacher and don’t pay into SS. I lost an extra $50 per paycheck that went straight to FED TAX!

    • Guest

      That’s right, you don’t pay into S.S. and you don’t receive any of it when you retire… because you have a pension. Oh, and thanks for your $50. – we can use that money now… we’ll pay you back when you retire.

  • marilyn

    guest that started out by saying boo-hoo, that wasnt nice, the people in this world including you need to start be nice to everyone, we have way too many mean crazy people out there, very uncalled for

  • xRatti

    Although the so-called Bush Tax Cuts were extended for two more years- – obviously the TAX With-holding rules were allowed to proceed as if the TAX CUTS were never extended. What a JOKE! ANd, the JOke is on the people who can least afford the jocualrity- – fixed income military retirees and social security recipients. Is it NOT IRONIC that Democrat/Liberals and Progressive Politicians continuously HARP about: “Those Nasty Republicans want to Steal your Retirement or Social Security Pay”- – AND, invariably, it is the Democrat Liberals (LIberalism is a dangerous Mental Disorder), Marxists, Progressives and Fascists who rape the incomes of senior citizens. Al Gore (Democrat) who cast the deciding vote to with-hold Federal Taxes on Social Security Payments- – What??? Did you say- Double Taxation is unconstitutional?? Since when does a Demoncrat give a flying – – – – about Constitutionality? I rest my case.

  • Its terrible.

    Its ashame how money is being taken like that from the Military – retirees.