Am I paying too much in taxes?

October 5, 2022 10:44 AM

My company seems to be withholding an exorbitant amount of tax from my paychecks. Or am I just bad at math? What should I do?

I just got a job with a $20k raise--good! But suddenly I noticed that my money wasn't going as far--bad! I blamed it on higher rent, higher prices, everything, but when I finally took a look at my paycheck I was having about $430 in taxes taken out per paycheck (I get paid weekly, so that's about $1700 in taxes per month). And when I crunched the numbers in the IRS tax return calculator, it said that I should expect a whole $7k in tax return next year.

I was so shocked that I actually asked to see if I was being paid the correct salary (yes, $90k). When I asked HR about the amount I was having withheld per month, I was told that I should submit a new W-4 if I wanted my taxes changed because I would need to take deductions if I wanted any of that money here and now.

Questions: Is this as wild as it seems? What actions can and should I take? Are my tax calculations correct and should I expect a big return next year? Or did I miscalculate and my company is withholding the absolute correct amount of taxes for someone taking my deductions and I'm going to get nothing? (I'm actually having trouble paying for things because of this extra $430 coming out of each paycheck, and I need to know whether this is a fixable HR fuckup on their end and I can really expect that $7k back next year or whether I just need to suck it up and get another job or two.) Also, if it is something on their end, why would they withhold such an exorbitant amount of money? I've had the exact same deductions in the past at different companies and either had to pay taxes (boo) or got back a refund that was $2k at most (yay!)

posted by anonymous to Work & Money (22 answers total)

When you started working, you filled out a W-4, stating how many deductions you planned to take. Ask your HR/payroll dept for details. You can change it, but be careful; if you don't have enough withheld, you might be charged a penalty.
posted by theora55 at 10:56 AM on October 5, 2022 [3 favorites]

It seems like for this question it would be extremely helpful/almost necessary to know (1) where you are located (country, and assuming this is the US or Canada, what state or province you are in, and possibly what city are you in) and (2) basic withholding information like if you are single or married or have dependents.

(1) in particular is going to affect the answer a lot. For example I am in NYC and the amount of tax you're paying is actually much less than what I'd expect for that salary here -- someone making $90K annually in NYC, or $1,730 weekly, would expect to pay ~$430 in federal/state/local income taxes and ~$140 for Social Security + Medicare, or $570 in total.
posted by andrewesque at 11:00 AM on October 5, 2022 [2 favorites]

That’s about 25% of your income to tax - which is about the same as I’ve always had withheld. Not sure if you can get lower than that withheld.
posted by General Malaise at 11:03 AM on October 5, 2022 [2 favorites]

I also wish this question were more clear and more detailed.

If this new $90k job is withholding $430 more per check than the $70k job, that’s obviously an error because that’s about $20k additional withholding a year. If it’s $430 total per check, I agree it’s normal-sounding, especially if in a low tax state and you have dependents, and we’d need to see more detail to advise.

Worst case you can absolutely go to HR and have them make your withholding smaller while you figure out the ideal number.
posted by michaelh at 11:14 AM on October 5, 2022

(If you’re like me and you thought to yourself, “yay! A $20,000 raise! I’ll have another $1,666 per month!” it’s worth noting that you’re taxed at a marginal rate so you going to see if the money from $70,000-$90,000 than you do from $50,000-$70,000.

And of course if this is a new job in a new state, that changes the taxes entirely!)
posted by raccoon409 at 11:18 AM on October 5, 2022

I get a big refund every year so sure it's possible. I've never adjusted my withholding from when I was originally hired. I could, but I don't really care to. And paying 25% of your income to tax at $90k seems wrong. My effective tax rate is like 10% (though I do have a spouse and kids) and make more than that.
posted by The_Vegetables at 11:20 AM on October 5, 2022

This is where online tax calculators can come in super handy. We don't know whether it's the right amount, but you can probably get a better sense by using one of these tools:

1
2
3

Go ahead and file the new W-4, and file your taxes as soon as the new year turns over.
posted by chesty_a_arthur at 11:22 AM on October 5, 2022 [1 favorite]

Use Paycheck Calculator

When you say taxes withheld, are you including just Federal Taxes, or does that include state, local, social security, or medicare taxes? That seems high for just Federal taxes but not high for all of those items together. What does your W-4 have right now for single/married and number of allowances?
posted by soelo at 11:25 AM on October 5, 2022 [2 favorites]

A single person without significant individual deductions would pay somewhere in the low 20%-range federal tax including FICA (OASD + Medicare), and could see another 2%-4% in state taxes depending on where you live. So ... not unreasonable?
posted by MattD at 11:29 AM on October 5, 2022

I agree this seems not high if it includes all forms of tax, social security, etc. It is about 22% of salary, or $20,400 per year. Assuming OP is single and taking the standard deduction, the federal income piece is around $12.5k. It seems not crazy that there could be an additional ~$8k in state/local/social security/etc. I wonder if the $7k refund OP mentions is actually the difference between the federal income piece and the rest of the taxes.
posted by Mid at 11:30 AM on October 5, 2022

When you used the "tax return calculator" was that the "tax withholding estimator" or something else?
posted by mskyle at 11:36 AM on October 5, 2022

Just anecdotally, that doesn't seem tooooo off base to me? It tracks roughly with what is taken out for taxes from my (slightly lower) paycheck. I normally get a refund around 1000-1200, which I'm sure I could probably somehow fix by messing around with withholding but haven't found it worthwhile to do.

Also anecdotally: as someone who is rather frustratingly not seeming to do any "better" despite numerically earning more, I think your initial instinct, that your money simply doesn't go as far as it once did due to rising costs elsewhere, is probably correct.
posted by We put our faith in Blast Hardcheese at 11:44 AM on October 5, 2022 [2 favorites]

I've done this using the withholding calculators linked above, but i didn't do it in the first year, because i had no idea what my refund would be. so..at the end of my first (tax) year at the new job i got my taxes filed and wasn't happy at how much was being withheld, so i adjusted until my refund was calculated to be pretty low.
It's things like this that make the US tax system seem so ungainly. It should be as simple as hey, my refund last year was 1200, so that means you took about a hundred a month too much, so give me a hundred more a month next year and it'll work out even right? but, hell no.
posted by OHenryPacey at 11:53 AM on October 5, 2022

Run your whole salary + all deductions through Paycheck City's calculator for your state. As long as the input is accurate (do it with a full paystub in hand), it will give you a good idea of where you should be. That number doesn't seem crazy high to me, but we're lacking some data. Bummer, I know.
posted by praemunire at 12:07 PM on October 5, 2022

Some payroll systems by default apply the withholdings based on that pay period, so the system is possibly calculating deductions as if they had been for the whole year. So this may be your future taxes, but this year averaged over the year it may be incorrect. (Hence a single large return.) Just an idea. Canadian here and that sounds reasonable.
posted by warriorqueen at 12:29 PM on October 5, 2022 [5 favorites]

Just as a sanity check, if everything is really comparable, your takehome at 90K should be higher than your takehome at 70K. That's how marginal tax rates work.

But ...

Did you move to a different state (or to a big city)? Changes to state and local taxes would change things.
Are you getting the same reductions like for 401K? If you were contributing to a 401K before but aren't now, you will be paying more (but takehome should still be greater).

If your takehome is less than before and you haven't moved then I'd guess that the number of deductions isn't what is was before.
posted by jclarkin at 12:42 PM on October 5, 2022 [1 favorite]

Canadian here and that sounds reasonable.

Makes sense for Americans, too. I don't think most payroll systems adjust for a lower salary at a different job for the rest of the year, and if the job was only started recently, then the "overwithholding" could be significant (because the proportion of the year's salary from the lower-paying job would be substantial). As you note, though, not really overwithholding, because the taxes would be correct for a year in which OP worked the full year at the higher-paying job.
posted by praemunire at 12:43 PM on October 5, 2022

Are you in the US? I'm going to assume you're in the US.

You need to stop everything and go spend some time with the IRS Withholding Estimator that chesty linked above. It is the ONLY thing you should be paying attention to, because it's (going to be) the only thing that knows your full set of data.

When you get to the final page of this tool, there is a slider bar which you can move up or down to change the amount of anticipated tax refund you'll get. In the section immediately underneath the slider bar, click the plus sign next to "how to adjust your withholding" and it will tell you exactly how to fill out your Federal W-4.

We can all make guesses and comparisons all day long here, but they're irrelevant. Use the calculator that the IRS built for you to use, and use it to update your W-4 to reflect a withholding election that you feel comfortable with.

I make a little less than you. I am maxing my 401k and my HSA. I need to withhold approximately 13.5% of each gross pay I get for FIT. That is what's correct for me and my full personal tax situation, to make sure I don't owe anything in tax season across all of my accounts and investments. It may or may not be correct for you.

If you want to memail me please feel free. I'm in HR and my job includes payroll. I give this exact advice (i.e. USE THE IRS CALCULATOR) to employees every single day.
posted by phunniemee at 12:53 PM on October 5, 2022 [12 favorites]

That seems about right to me: similar salary, Illinois, single, no dependents. I get a small refund most years but a chunk of that is often due to mortgage interest and other homeowner-related deductions.

Just for reference, across federal, state, medicare, and social security I pay $965 per paycheck. I get paid twice a month so doing the math (x24 paychecks divided by 52 weeks) that comes out to $445 per week.

You'll get a return for 2022 because those paycheck deductions assume you are getting paid the whole year at the same level of that single pay period, but in actuality for the bulk of the year you were earning 20k less. But in future years it will be correct because you're actually earning that salary all year.
posted by misskaz at 12:53 PM on October 5, 2022 [2 favorites]

OP is in the US as they mention the IRS website as well as a W-4 from the employer.
posted by soelo at 1:11 PM on October 5, 2022 [1 favorite]

In addition to the IRS calculator, take a good hard look at a payslip from your current and past job and look at *all* the deductions to see what's accounting for the difference. Are you contributing significantly more or less to a retirement fund at the new job? Did one job or the other have a significant deduction for some benefit like a pre-tax bus or parking pass that the other didn't have? Is one in a different tax jurisdiction than the other? Are your health insurance rates very different? If you need to to get it clear in your head, you could make an itemized list of every single deduction and compare them one by one to find the significant differences.

The numbers you're giving us don't seem wildly off base. I suspect you'll find that they're right, that you'll get a big one time return this year, but that in future years where you work at that salary the full 12 months, you'll have little or no refund. But no one could say for sure without all the pertinent numbers. If this is make or break for you, it might be worth paying for one visit with an accountant who can walk you through exactly what has changed in your financial situation.
posted by Stacey at 4:45 PM on October 5, 2022

Also, just to address another angle on the W-4: the form (and all the calculations associated with filling it out) were changed, and the new form became mandatory as of Jan 1, 2020. If you filled out the W-4 after that date, you would have had to fill out the new form. It is now based on dollars, not on allowances. It does require a bit more thinking up front, but also allows you to get a much more precise result. Any advice that is telling you to increase the number of allowances is outdated.

phunniemee's comment is spot on about how to fix this. The only caveat is that you have two options - try and overcorrect this year so that your year-end number comes out right, or just correct going forward so that next year comes out right, and this year is less wrong. If you go with the overcorrection route and intentionally underwithhold for the last three months of this year, be absolutely certain that you remember to file another W-4 at the start of the year, or else your intentional underwithholding will continue into next year, and you'll be looking at a huge tax bill when your 2023 taxes come due in 2024.
posted by yuwtze at 7:17 AM on October 6, 2022 [1 favorite]