Tax Researcher
April 2009
THE ECONOMIC STIMULUS PLAN—WHAT IMPACT DOES IT HAVE ON PAYROLL?
The American Recovery and Reinvestment Act (ARRA) of 2009, also know as the economic stimulus plan, was signed into
law by President Obama on February 17, 2009. It includes four provisions that have a direct impact on either payroll
taxation or payroll reporting. Below is an overview of them; for more detailed information, you may visit www.irs.gov.
The Making Work Pay Tax Credit
For 2009 and 2010, the Making Work Pay provision of the American Recovery and Reinvestment Act will provide a
refundable tax credit of up to $400 for working individuals and $800 for married taxpayers filing joint returns. This tax
credit will be calculated at a rate of 6.2 percent of earned income and will phase out for taxpayers with adjusted gross
income in excess of $75,000, or $150,000 for married couples filing jointly.
For people who receive a paycheck and are subject to withholding, the credit will typically be handled by their employer
through automated withholding changes. The IRS has issued revised income tax withholding tables for wages paid
through December 2009. The tables are effective as soon as possible but no later than 4/01/2009.
These changes may result in an increase in take-home pay. The amount of the credit must be reported on the employee’s
2009 income tax return filed in 2010. Taxpayers who do not have taxes withheld by an employer during the year can also
claim the credit on their 2009 tax return.
It is not necessary to submit a Form W-4 to get the automatic withholding change. However, an employee with multiple
jobs or married couples whose combined incomes place them in a higher tax bracket may elect to submit a revised W-4
to ensure enough withholding is held to cover the tax for his or her combined income. IRS Publication 919 provides
additional guidance for tax withholding.
Temporary Increase in the Earned Income Credit
The Act also provides for a temporary increase in the Earned Income Tax Credit (EITC). For taxable years beginning in
2009 and 2010, the credit percentage for eligible taxpayers with 3 or more qualifying children has been increased to 45%
of the family’ s first $12,750 of earned income. In addition, there is a reduction in the amount of the marriage penalty. This
reduction for 2009 will be $5,000; this amount will be adjusted for inflation in 2010.
These adjustments are reflected by the IRS in revised advance earned income credit tables for 2009. These tables are
effective as soon as possible but no later than 4/01/2009.
Transportation Fringe Benefit Parity
ARRA also provides parity for transit benefits. Effective March 1, 2009 through December 31, 2010, the amount excluded
from income for commuter transit benefits and transit passes will be the same as the amount excluded for qualified parking.
As a result, effective March 1, 2009, the maximum monthly benefit for transit will be increased from $120 to $230 to equal the
maximum monthly amount allowed for parking for 2009. This parity will continue for 2010, but is set to expire after that year.
COBRA Health Insurance Continuation Subsidy
ARRA included changes to the health benefit provisions of the Consolidated Omnibus Budget and Reconciliation Act,
known as COBRA. The new law affects former employees and their families, employers and others involved in providing
COBRA coverage.
Workers who have lost their jobs may now qualify for a 65% subsidy for COBRA health insurance premiums, for
themselves and their families, for up to nine months. Eligible workers will have to pay their former employers 35% of the
premium. In order to qualify for the subsidy, a worker must be considered an assistance eligible individual. They must
have been involuntarily separated from their employment between September 1, 2008 and December 31, 2009. Workers
who lost their jobs between September 1, 2008 and the enactment of the legislation, but failed to initially elect COBRA
because it was unaffordable, get an additional 60 days to elect COBRA and receive the subsidy.
The amount that an assistance eligible individual receives as a COBRA premium subsidy will not be considered taxable income.
Subsidy Income Limitations:The subsidy phases out for individuals whose modified adjusted gross income exceeds
$125,000, or $250,000 for those filing joint returns. If the individual’ s modified adjusted gross income in any year in which
the subsidy is received is between $125,000 and $145,000 if filing single or is between $250,000 and $290,000 if married and
filing jointly, they are eligible to receive a partial subsidy.
If the individual’ s modified adjusted gross income in any year in which the subsidy is received exceeds $145,000 (for
single tax filers) or exceeds $290,000 (for married filing jointly tax filers), they are not eligible to receive the subsidy.
Individuals who have or anticipate their modified adjusted gross income will exceed the limits for any year in which they
are subsidy eligible may irrevocably waive their rights to the subsidy. Failure to make such waiver when ineligible due to
exceeding the income limitations for the subsidy will result in a recapture of the subsidy by the Internal Revenue Service
when the individual files their personal tax return.
Reimbursement of the COBRA Subsidy:The person to whom premiums are payable under COBRA is entitled to be
reimbursed the 65 percent subsidy paid on behalf of the assistance eligible individual. In cases where the employer’ s
plan is subject to COBRA, ARRA identifies that entity as being the employer notwithstanding the fact that the actual
premiums may be received by a third party, such as a third party administrator, on the employer’ s behalf.
The former employer pays the 65% balance and claims a credit for those payments on Form 941, Employer’ s QUARTERLY
Federal Tax Return or other applicable payroll tax return. The COBRA continuation provisions also apply to small businesses
and government entities required to offer continuation coverage under state law similar to the federal COBRA.
The COBRA premium subsidy paid by the employer is treated as a credit toward its payroll tax liability as of the date that
the assistance eligible individual’ s premium payment is received, in an amount equal to the COBRA subsidy amount paid
by the employer. If the amount of the COBRA subsidy paid is overstated by the employer, the overstated amount will be
treated as an underpayment of payroll taxes and may be assessed and collected by the IRS as such.
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