Payroll screw up

[Bott1637]

Previously I posted on how I can avoid a 25k tax bill going forward.

https://www.whitecoatinvestor.com/forums/topic/how-do-i-avoid-another-25k-dollar-tax-bill/

I eventually calmed down and was able to treat this as a first world problem.  Made some heavy changes to my withholding and felt OK about my plan going forward to avoid this happening again.  However, it has now come to light this was an issue with our payroll department.  Enough physicians have now complained to each other about it we'v realized everyone has the same problem.  Many have tax bills two or three times higher than mine.  One dual physician couple reportedly has one north of 150k.  I think the issue is the handling of our bonus checks being taxed at only 20% rather than at marginal rate.

Is there any recourse anyone knows of that we have against our employer on this?  They changed the payroll system in the last year and I'm sure that is where things got messed up.  Is there at least anyway people can avoid the penalties they owe given their employer screwed them rather than it being anyone trying to avoid paying?  I think my marriage last year is the only thing that prevented me owing a penalty.

I post as well as a reminder to make sure you have an emergency fund even though you make a lot of money.  Many of my colleagues are now having to borrow to pay the tax man.

[jfoxcpacfp]

Wow - so you really were justified to "****************************** out your payroll people"? My apologies and what a mess!

Send How to Get Out of a Tax Penalty to your colleagues regarding penalties and I think they will have a small thing to be happy about.

[DMFA]

Bott1637 wrote:

Previously I posted on how I can avoid a 25k tax bill going forward.

https://www.whitecoatinvestor.com/forums/topic/how-do-i-avoid-another-25k-dollar-tax-bill/

I eventually calmed down and was able to treat this as a first world problem.  Made some heavy changes to my withholding and felt OK about my plan going forward to avoid this happening again.  However, it has now come to light this was an issue with our payroll department.  Enough physicians have now complained to each other about it we’v realized everyone has the same problem.  Many have tax bills two or three times higher than mine.  One dual physician couple reportedly has one north of 150k.  I think the issue is the handling of our bonus checks being taxed at only 20% rather than at marginal rate.

Is there any recourse anyone knows of that we have against our employer on this?  They changed the payroll system in the last year and I’m sure that is where things got messed up.  Is there at least anyway people can avoid the penalties they owe given their employer screwed them rather than it being anyone trying to avoid paying?  I think my marriage last year is the only thing that prevented me owing a penalty.

I post as well as a reminder to make sure you have an emergency fund even though you make a lot of money.  Many of my colleagues are now having to borrow to pay the tax man.

Click to expand...

I think they're supposed to provide some guidance to "new hires" regarding how much a person should expect their withholding to be when you file your initial W-4 up front.

Our special pays in the military are also withheld up front at 25% (def higher than most of our effective rates in the military), but get taxed just like the rest of income.  The IRS recommends employers withhold on "supplemental wages" that way since there is a variation in what various people's actual tax due on it will be.  I have to have my usual pay withheld at about 18% while my supplemental pay is at 25% to make it close to my projected effective rate of 20%.  I calculate my estimated income and all deductions at the start of the year and re-adjust my W-4 accordingly.

The government and employers seem to have the attitude of "you should know this" when it comes to it, but I think the way a lot of people learn is just the way you did.  I mean, when the average person gets a big paycheck, is the first thing they think "I wish this was taxed more?"  Though it's not like you were taxed more after receiving the same amount; you received a higher amount than you should have gotten without it being taxed, and now have to pay taxes on it.  Hell, my employer USAF) just up and quit paying me for two months because they overpaid me the prior four since they mis-calculated my time served.

I feel bad for you; I do.  Your payroll department (everyone's payroll department) should have better educated you regarding appropriate withholding and the need to account for the up-front withholding on supplemental wages.  I'm not fully sure this was really their "screw up" or they "screwed" you, though.  I mean, I'd be pissed, too...

[Bott1637]

Thanks Johannah I'll share that around as much as I can.

DMFA while no one got screwed out of any money (assuming they get out of the penalty), for an employer to change they way they were taxing supplemental income and not inform their employees is getting screwed. This isn't about a new hire getting mislead. People who have been employed there for 20 plus years and never had a problem had their withholdings changed without any notice to withhold extra from their "supplemental income".

[EDDOCMOM]

In 2014 they changed some tax laws regarding tax-free savings for childcare meaning that highly compensated ($100,000+) employees were unable to contribute to this.  They amended it in 2015 and I had to 1. pay taxes on the $2500, 2. refile, 3. pay my accountant another fee to refile as this was mailed out in late February and we had already filed taxes.  My employer paid $0 for reimbursement so I was out a couple hundred dollars.  First world problem, admittedly, but annoying and aggravating just the same.

[DMFA]

EDDOCMOM wrote:

In 2014 they changed some tax laws regarding tax-free savings for childcare meaning that highly compensated ($100,000+) employees were unable to contribute to this.  They amended it in 2015 and I had to 1. pay taxes on the $2500, 2. refile, 3. pay my accountant another fee to refile as this was mailed out in late February and we had already filed taxes.  My employer paid $0 for reimbursement so I was out a couple hundred dollars.  First world problem, admittedly, but annoying and aggravating just the same.

Click to expand...

You can still get 20% credited, up to $3,000 for one child and $5,000 total for more than one. That's for funds not used from a dependent-care FSA (you can stack, but not double-dip).

We spend about $12,000/yr for 1 child. $5,000 comes from an FSA ($2,032.50 back 33% WH and 7.65% FICA), and the rest factors into the dependent care tax credit which is maxed at 20% or $3,000 ($1,400 back), resulting in a total of $3,432.50 of tax advantage, good for a total of a 28.6% discount on daycare. Not too bad, really.