US Tax withholding question - ignorance, incompetence, or shenanigans?

March 10, 2023 10:32 AM

Last year I changed from Company A to Company B. After changing jobs, I discovered that Company B is withholding considerably less Federal income tax than Company A, about 80% less. All of my other tax categories (social security, medicare, state income) are being withheld at the same rate as Company A. My W-4 at Company B was filled out via an ADP webform and I double checked the form and, to my knowledge it is all correct (married, filiing jointly; no dependents, no additional withholding). I am asking ignorance, incompetence, or shenanigans because I have reasons to believe that Company B is not exactly above board with respect to, well a lot of things including accounting.

I'm not someone who pays super close attention to their finances, I am recognize this is a privilege and I'm not in a place where paying these taxes is going to be a burden, I have the money. I just want to understand how this could be fucked up and if there is some reason for a company to withhold less on an employees taxes that would produce some accounting benefit for the company at the expense of the employee, or if the company's controller is simply incompetent, or if I just don't understand how this all works. Any of the 3 scenarios are fully in play.

Company A was a well established, profitable small business that I worked at for 10 years and left for reasons of general ennui. They generally looked after their employees, particularly with regard to compensation and benefits.

Company B is a tech startup, a pretty poorly run one at that. As employees, we don't know anything about the burn rate, where the money is coming from, really anything with regard to the business/accounting side of things; we're just engineers. I understand these are red flags, so you don't need to tell me that.

For 2022 Company B withheld 8.9% of my gross income (~103000)
For 2020 Company A withheld 17.2% of my gross income (~106000)

I was married filing jointly both years. My income puts me in the 22% marginal bracket. The lowest tax bracket is 10%. How in the world, can someone decide to withhold 8.9% Federal income tax and think that is going to work out?

posted by anonymous to Work & Money (7 answers total)

Have you switched from a Roth 401(k) at previous job to a Traditional 401(k) at the new job? That would explain difference in withholding. As one random example, a married couple with one person having a fully funded Traditional 401(k) ($22,500)
and claiming the standard deduction ($25,900 for a married couple) with 1 kid would have a effective tax rate of much less than 8.9%, so there's nothing inherently wrong about the withholding that you suggested.

I just want to understand how this could be fucked up

I'm not entirely sure the impact is all that much so long as you are able to pay your taxes - and it sounds like you are. The worst that could happen is an underwithholding penalty from the IRS when you file your 2022 taxes, and those penalties are generally very small. For instance, I incurred one when I underwithheld my taxes by about $15K. The penalty, if I recall correctly, was about $100.

How in the world, can someone decide to withhold 8.9% Federal income tax and think that is going to work out?

Withholding is done by IRS guidance in Publication 15. Your employer/payroll service doesn't actually have any flexibility in how they interpret your W4. Withholding is essentially a formula based on your W4. You can go through the process yourself to see what your withholding should be.

There's no strong connection between withholding and taxes. For a number of folks, their default W4 withholding is not appropriate for their tax situation. That's why you can adjust withholding on your W4. It shouldn't really matter to you whether they withhold the correct amount per Publication 15. It should matter to you they withhold the correct amount for you to pay your taxes. If you believe your tax situation will result in taxes higher than the W4 withholding amount, you should request additional withholding on the W4. There's no reason for a legitimate company to care whether they underwithhold, or overwithhold your income. They have no claim to the money anyway (its not an asset for them), and they aren't penalized if you owe taxes (provided they follow Publication 15 correctly). Lacking any additional information, I would suspect that somehow your W4 got mistranslated in software somehow - perhaps you got recorded as married when you are single, or having 10 dependents when you have none.

If you think your company is potentially literally stealing withheld money, then you are getting into criminal matters. If that's the case, I would suggest leaving your employer, regardless of whether the tax withholding.
posted by saeculorum at 10:44 AM on March 10, 2023 [3 favorites]

You were at Company A for 10 years. When was the last time you edited your W-4? The Federal W-4 changed substantially in 2020--the old system of allowances/exemptions got replaced with a different set of ways to calculate your withholding math.

If you didn't update your W-4 in 2020, then your payroll system likely continued to grandfather the old, pre-2020 math calculation.

When you got your new job at Company B, you definitely filled out the new version of form W-4. There is a very specific worksheet on this version for married spouses who file jointly and work multiple jobs. If you didn't go through all of the steps, you did not fill out your withholding election appropriately for your situation. I'm in HR, I run payroll, I even do it on ADP. I see this all the time. People hate taxes, people hate forms, people do not read, people do not do math, and people do not check their pay stubs.

I will also tell you that it is considerably MORE work inside of ADP for an admin to make individual changes to any one person's tax setup, there's no reason why anyone would do it, and I believe the system is also set up to notify employees if any change has been made to their tax documents since they're housed inside of an e-signature workflow in the system.

I'm sorry you're in this situation, but I do strongly believe it is of your own making.

Here's what you need to do:
1. Go use this IRS calculator
2. Spend time with it in exhausting detail with your spouse
3. Compare the IRS advice for how to fill out your W-4 vs the W-4 document you completed inside of ADP. Are there differences?
4. Fill out a fresh W-4
5. Check your pay stubs, every time. If you don't understand something, ask your HR team to explain it.
posted by phunniemee at 11:00 AM on March 10, 2023 [7 favorites]

Yes, the 2020 changes tripped up a lot of people. As a fallback, note that even if you can't quite figure out what went wrong, you ought to be able to request additional withholding per pay period to bring your withholding up to par with what was withheld in prior years. The IRS doesn't care whether the withholding comes from the company calculations or from your request to do additional withholding. You will be in a safe harbor for underwithholding as long as you withhold at least as much as your 2022 tax liability. But in the end it will be better to sort it out for good as described above.
posted by praemunire at 11:05 AM on March 10, 2023 [2 favorites]

Came to say what praemunire said, you can request the company withhold an additional dollar amount per check, whatever makes you most comfortable.
posted by Glinn at 11:07 AM on March 10, 2023 [2 favorites]

Does your spouse have income?

For gross income of $103,000 and MFJ, assuming no other deductions or income you would only owe about $8800 in taxes which is an 8.5% tax rate. So your 2022 withholding sounds correct.

If your spouse works too, you need to either check the Multiple Jobs box or fill out the Multiple Jobs worksheet to make sure more is withheld.
posted by muddgirl at 11:31 AM on March 10, 2023

Also there is a hidden 0% "tax bracket" which is the standard deduction of $25,900 for married filing joint. So if $103,000 is your total income, your top tax bracket is only 12%.
posted by muddgirl at 11:42 AM on March 10, 2023

By "correct" I mean it matches the appropriate withholding for a W4 filled out MFJ, no dependents, no additional withholding, Multiple Job Box unchecked.
posted by muddgirl at 11:48 AM on March 10, 2023