Is it legal to retrotax overtime checks??

Question

So I started a new full time salaried job about 2.5 months ago. I just received my first OT check (worked 30 hours of OT). Federal taxed me for 24.99% of my gross. State taxed me 8.83% of my gross. The state tax amount taken from this check alone amounts for 26.89% of my YTD withheld. Fed Tax from this check is 21.63% of my YTD withheld. Yet my OASDI and Medicare deductions are in line with the rest of my checks.

Upon calling payroll to try to understand what has happened, I am told that they calculate my tax bracket monthly and assume I make that much each month. Payroll says my tax bracket probably went up which is why it is so much higher. When I asked how one or two tax brackets changes my percent federal taken from 14.3% to 25%, they said they retro-tax me for checks I have already been payed in that month.

How is this legal? And why is my tax bracket figured monthly instead of quarterly or bi-anually? "It's in my best interest" is not an answer I'm happy with.

Answer 1

That answer isn't quite right, but is close. You don't say how often you are paid, but since you mention other checks that same month, I'm guessing maybe it's weekly.

The way withholding works is that it's calculated each pay period as if you made that amount every pay period. That's government rules, not just something your employer has decided to do. So if you got 30 hours overtime in one pay period, it would look like your earnings are huge, although you really don't make anywhere near that every week.

The second way they are allowed to withhold is, for special checks like bonus or just overtime, withhold 25%.

The good news is that when you file your tax return, what counts is how much you really made for the year, and your tax is figured on that. So if you overpaid because you have too much withheld, you'll get the extra refunded to you. Your withholding on the OT check is high, but your actual tax on it is the same as the rest of the year.

Answer 2

Why does it matter? If they take out too much, you will get it back.

Bonuses and overtime are frequently taxed at the highest rate, or cause you top be moved way up in brackets. Think about it - the tax bracket is based on the estimated annual income. If you get an overtime check and they ASSUME that is part of your normal pay, it will cause your estimated annual salary to go way up.

Your taxes are calculated on every check, not quartery or monthly.

Answer 3

Your payroll department is using a different method that works on keeping up what you need year to date. It will all work out in the wash when you file your return.