This morning, I checked my biweekly earnings statement, and to my surprise, I am receiving $200 less than usual.
Upon comparing the stub to previous paychecks, I see that there is a $500 deduction for my company car. I assume this is some kind of housecleaning that payroll needs to do by the end of the year on their end. Because I am under the threshold on company car mileage, and should not owe anything beyond my monthly use fee, payroll gave me a $500 earning credit on the paycheck, to cover the deduction. However, this $500 credit is being considered taxable income.
So my taxes went up across the board. Federal and state income tax, social security, medicare. All said and done, somewhere between $160 and $200 off the normal amount deducted.
As far as I can figure, by giving me that $500 credit to cancel out the $500 deduction they needed to take from my check for whatever, presumably administrative, reason, my taxable income was bumped into a higher bracket for one paycheck, and I am being screwed out of my hard earned money, to the tune of about $200.
Now I know I can’t exactly fight the government for taxing what they’re going to tax. But what basis can my company have for forcing $500 more taxable income on me that is immediately deducted in full in the same paycheck, messing with my taxes, and not covering the hit to my net income accordingly? Is there any way that I can fight to get the money that I lost because of their creative accounting? Is this creativity even legal?
I know company peons think the company is trying to screw them, but most of the time if they just look into it they will see that the government is forcing the company to do the things they do.
Just ask. If something is wrong, 9 times out of 10 you will see a solution. Heck, just yesterday my boss dated the paychecks for this week at 2 weeks from now. I spoke up and the mistake was corrected.
The paycheck is broken down into “Earnings” and “Deductions.” I guess I just wasn’t clear. There’s $500 in the (taxable) earnings and $500 in the deductions.
And scottkris, a message has already been left with Payroll. And boy howdy will I be following up until it’s explained to me. I just wanted to know anything that I might want to bring up with them, going into a conversation.
Sometimes when your pay jumps suddenly, like extra cash from overtime or some reimbursements (some), payroll jumps in and withholds extra, as if you are on a new pace to earn a whole lot more annual income (hundreds of dollars more one week means thousands in annual income).
When your tax worksheets are done in 2007 for 2006, you realize back any extra withholdings in the form of a tax refund.
Then again, I could have missed the whole point of the OP.
Standard disclaimer: I am not a tax accountant/lawyer.
I think I understand. The company car, since you get to use it for your own personal use, has to be considered a benefit that is required to be considered as part of your pay. They have calculated that to be a benefit valued at $500/month. So they inlude that in your paycheck. But they aren’t actually giving you $500, you are already getting that in the use of the car. So they have to deduct it on the other side when the actually money is given to you.
So for tax purposes they have to include the $500, but for your actual pay you don’t get it in cash, rather as the benefit of the car. The only option to not getting this extra income, is not taking the company car, I suppose.
You are not being screwed out of your hard earned money, as it will all come out in the wash when you do your taxes. Either you will get a slightly larger refund, or have a slightly smaller tax burden in April.
I agree with Philster that the withholding is just done “wrong” (but not actually wrong since they have to withhold based on your actual paycheck). It will work out as a refund on your tax return. We have the same issue when we get our yearly bonuses.
What you are describing is the impact of “Imputed Income”.
Per IRS, a company car that is also used for personal reasons by an employee is considered a taxable benefit. The company must collect this tax from the employee. Out of the goodness of their heart, the company can choose to up the employee’s income to offset this tax cost. This is what your employer did. However, this additional income is just that, income. Income is taxed. And, as you pointed out, this additional income raised your overall tax “bracket” for this paycheck.
As others have pointed out, you should expect to get it back when you do your taxes in the spring.
Don’t beat up on your payroll department. Go out, take a ride around town in your (essentially free) company car, and count your blessings.
I could be wrong but a company car (if given to you for your own full time use including when you are not working) is part of your salary and as such would be taxable income, $500 seems awfully cheap for an annual estimate of what the car is worth as it relates to income…when I had a company car we used to figure it’s worth as between 5-7,000 a year in addition to salary…this was because not only was the company picking up the vehicle cost but also gas, insurance, maintenance and taxes, etc…FYI the company I worked for never added this into my check as they seem to have done for you, so my tax reported income was only from my cash salary and not the additional car costs…
Right, so they give you an extra $500 before tax, but then they deduct $500 after tax. So you get taxed on a higher gross amount and end up a couple of hundred dollars short compared to your usual pay.
As others have said, it all gets sorted out when you do your taxes, but it’d still be interesting to know why payroll had to do it that way, and why they had to make any deduction at all.
It almost sounds like the opposite of a system we have in Australia where your employer can pay the lease on your private car. Expenses such as maintenance and fuel are claimed by the employee every so often and are deducted from your gross salary (reducing taxable income) and refunded direct to your bank account. This effectively gives you a lump of tax free salary.
From one who has written payroll programs in the past, I think that the crux of the problem is the way that the computer is calculating your taxable income.
The normal method is to take your gross income for the pay period and multiply by the number of pay periods in a year to determine your annual income for withholding purposes.
So, if you get an extra $500 in your check this pay period, assuming you are paid twice a month, the computer thinks your annual income is $12,000 more than it really is ($500 x 24 pay periods). This is also a problem when people get a bonus in their check.
As others have said, no one is really cheating you out of anything. When you file your taxes it will all come out in the wash.
Sure, they are not cheating him. However, many people budget for what they expect their paycheck to be every two weeks, and don’t have much of a buffer to accommodate a one time reduction in pay. I know when I was in college, if I lost $200 for 2 weeks, it would put a serious crimp in my bill paying ability.
When you file your taxes at the end of the year, it’s based on the total for the year. If they withheld extra now it’ll either be returned to you as a refund or be credited towards anything else you may owe.