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I'm in tax bracket A.

My employer takes out the appropriate taxes reach pay for my tax bracket.

During a special pay period, my pay is much higher than normal. If my pay was ALWAYS what it is in this particular pay period, I would be in a higher tax bracket (B).

The amount of "extra" alone does not actually push me into B.

My employer takes taxes out during this period as if my pay during that period was what I got paid every pay period, resulting in a much higher chunk of my pay going to taxes than it should.

Is my employer correct to do so?

This is in the USA, just to be clear.

Cloudy
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Ethan The Brave
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1 Answers1

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TL;DR - Withholding from regular paychecks is done at effective tax rate as if you had that paycheck for the whole year.

Example: Your gross paycheck is $5000 monthly. That is $60K annually. Income tax on $60K is $12K (simplified and using made-up numbers). That is $1000 income tax withheld from each paycheck.

Then if in some other month your gross paycheck is $8000, it is extrapolated to $96K annually, ignoring that you were not actually paid $8000 every month for the whole year. Income tax on $96K is $24K (again using made-up numbers for the sake of this explanation). Divided by 12 pay periods per year, this amounts to $2000 income tax withheld from this particular paycheck.

Note that this works differently with bonus paychecks - income tax is withheld at your marginal rate from them.

void_ptr
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