Making Work Pay Credit

• Posted on February 18, 2009
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“Making Work Pay” credit provides a refundable credit of 6.2% of a taxpayer’s earned income not to exceed $400 for individuals and $800 for joint filing couples and applies only to 2009 and 2010. 

This credit reduces an individual’s tax liability on a dollar-for-dollar basis. Any excess over a taxpayer’s tax liability will be funded.  Nonresident aliens, estates, trusts, or individuals who can be claimed as a dependent on someone else's return do not qualify for this credit.

The credit is the lesser of:

• 6.2% of an individual's earned income or
• $400 ($800 in the case of a joint return).

Example - For individuals with earned income above about $6,451, the credit maxes out at $400 ($6,451 x .062).  For married couples filing jointly with earned income above $12,902, the credit maxes out at $800 ($12,902 x .062). Thus, the credit for individuals above those income amounts will receive the maximum credit, while those below will receive a reduced credit.

This credit phases out at the rate of 2% of modified AGI, starting at $75,000 for individuals and $150,000 for joint filers.  It is fully phased out at $95,000 for individuals and $190,000 for joint filers. 

For 2011, the Making Work Pay Credit is replaced for one year only (2011) with a 2 percentage point reduction in the employee’s portion of the payroll tax (OASDI), from 6.2% to 4.2%.  The reduction applies to all wage earners regardless of income.  The employer’s share of the payroll tax is unaffected.  For wage earners with payroll in excess of the $106,800 payroll tax cap, their savings for 2011 will be $2,136 (2% of $106,800). The OASDI portion of the SE tax for self-employed individuals would also be reduced by 2 percentage points, reducing the overall SE tax from 15.3% to 13.3%.