It's Taxing Me!
August 31, 2006 4:34 AM   Subscribe

Tax Question -- My employer owes me over a month's worth of retroactive salary increase. Will I be end up paying more in taxes when this fat retroactive amount finally gets tacked onto my normal paycheck?
posted by archimago to Work & Money (9 answers total)
The accountant involved should be working out your taxes in the same way you pay them: yearly (well, as a percentage of your yearly income).
posted by Kickstart70 at 5:04 AM on August 31, 2006

The percent coming out of that lump should be the same as the percent coming out of a usual paycheck (at least, that was the case for me when a similar thing happened).
posted by inigo2 at 5:05 AM on August 31, 2006

Even if they get it wrong, you can square everything at tax time.
posted by futility closet at 5:08 AM on August 31, 2006

it all works itself out by next april 15th though
posted by caddis at 5:09 AM on August 31, 2006

You pay taxes based on how much you made during the calendar year. Even if the withholding out of this particular check is a little off, it all works itself out next april.
posted by knave at 6:29 AM on August 31, 2006

Seconding knave's answer.
posted by KAS at 6:36 AM on August 31, 2006

This IRS document has the tax tables to figure it out yourself. They're near the end. You might notice that the withholding for a pay period is based only on how much you are paid in that one period. It makes things much simpler, but rather inaccurate.

The practical effect of this is that the extra pay will be withheld at a higher tax rate than it should. It kind of sucks. But as others have said, withholding is wrong all the time and it works out at tax time.
posted by smackfu at 6:55 AM on August 31, 2006

It should probably be noted that the withholding from every check you got before your raise was wrong, too. They weren't withholding enough. That is, since you got a raise in the middle of the year, you're going to be making more in this calendar year than you were being taxed for throughout the year. So, a little extra withholding on this particular check might actually help balance out that inaccuracy.
posted by knave at 7:01 AM on August 31, 2006

Part of the answer of how your withholding will come out depends on the person who processes your paycheck. I've done payroll, and often had situations where someone was getting an "extra" week pay in addition to their regular check because they were missing a paycheck or were getting a pre-paid vacation. I could make a notation in the computer that this pay period should be taxed as if it were two weeks instead of one, and that kept the withholding from being bumped up to a higher tax bracket.

But not everyone does that. If your payroll processor is in-house, it wouldn't hurt to ask if the retro pay can be put on a second check and taxed at a higher "tax frequency". Sorry, I can't explain that better without knowing your payroll processing system.

If not, as the others said, it will balance out in April.
posted by saffry at 5:17 PM on August 31, 2006

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