We do additional withholding - right there on the first page of the W-4. After a few years I have a pretty good idea of how much extra to pull out from every paycheck so I don’t get hit with a large tax bill.
For an employer to ignore that would be huge for us - into the “we’d pay penalties to the IRS for under reporting our taxes” end of huge.
Normal? I doubt it is legal.
Someone took a terrible shortcut. It is going to bite them real soon now.
Assuming the Gov’t isn’t being cheated out of money owed them, individual employees are.
But when all is said and done…have you ever known an employer to get in trouble for not calculating withholding correctly as long as they have the W-4 on file and withhold something?
If you do then I’ll bet it is a very rare occasion and came about only after other significant problems put them on an agent’s radar.
I don’t know about overtime, but the 25% figure is pretty commonly used when taxing bonuses.
The IRS withholding algorithms are incredibly hard to follow. Arguably they’re based on a percentage of the income, but it’s not a simple percentage. It’s something like this:
Your weekly (or whatever) gross is a dollars.
No tax on the first b dollars.
100 dollars tax on the next c dollars
200 dollars on the next d dollars.
300 dollars on the next e dollars.
Each of those buckets is because of how income tax is calculated - if you’re at the 33% rate you’re not paying 33% on everything, but only the amount above the 33% threshold.
You can NOT take a specific percentage for income tax aside from bonuses (or overtime?). You can take a specific percentage for Sociial Security and Medicare. For that, you CAN say “your after-tax pay is 25.00 an hour” but you have to show that the pre-tax pay is 27.07 (if my math is right - the SS/Medicare from that would be 2.07). The employees’ withholding is very personalized based on their individual circumstances, and there’s a lookup table.
For that 27.07, assuming they work 40 hours a week their pay is 1,082.83. According to IRS withholding tables, a single person with 2 withholding allowances that reduces their taxable pay by 152.00 so their taxable pay is 930.83. That would result in federal withholding of 96.75 + 25% of the amount over 753.00 - or 131.21.
A married person with 3 exemptions, with the same pay, would have taxable income of 854.83 (exemptions are 76*3 or 228), then their tax is 34.90 plus 15% of the amount over 512. Their tax (if I’ve done it right) would be 86.32.
In the long run, it would all net out at the end of the year - an employee who was overwithheld would get a refund and someone who was underwithheld would owe - but the bottom line is the employer is NOT doing it according to the rules.
I’m gonna go out on a limb here and guess that they aren’t using an actual payroll program.
There will be tears when, not if, this winds up on an auditor’s radar.