Payroll Tax question

From: "J.D. Baldwin" <baldwin@netcom.com>
Subject: Payroll Tax question
Date: Mon, 11 May 1998 06:47:43 -0700 (PDT)

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Jamester <jamester@alumni.EECS.Berkeley.EDU> wrote:
> I changed job about a couple of weeks ago and have just received my
> unused vacation check from the old company. I looked at it and
> compared it with the old regular paycheck. What I found was they
> actually took straight 28% out of my vacation check for fed and 6% for
> State (Calif).
> 
> [...] Am I getting ripped off here? Is it normal for companies to use
> diferent formula to deduct taxes out of a vacation check? Is it
> supposed to be 28%?

I have no idea what the tax code requires for withholding in these
situations, but I can tell you (from having supported payroll systems)
that what you describe is quite common for vacation and bonus checks.
I don't particularly care for this state of affairs, but if it makes
you feel any better, I dono't think you're being ripped off.

The rationale, I believe, is that the extra check is "found money,"
and should be taxed at the straight marginal rate for your bracket
(or the highest bracket you could reasonably be in).  Your regular
paycheck withholding is calculated based on the TOTAL expected tax
rate, which can be forecast from your total salary.  Even if you're
in the 28% bracket, that's going to be rather less than 28%.  The
vacation or bonus check, though, would sort of throw that estimate
into a cocked hat, so to be "safe" they just withhold the full 28%.

It's early enough in the year that if you wanted to sit down and do
some calculations, you could tweak your W-2 exemptions to make it all
even out in the end.  Me, I like underpaying just a bit and having to
send IRS a check in April.
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