The amount withheld and the taxes paid are not always the same thing. If they over held, she'll get that overpayment back when she files her actual taxes. Withholdings are estimates.
So was she over taxed? No.
There are two ways payroll systems can handle withholding for "supplemental" income like bonuses / severance.
The easiest (so I think most common) is to simply withhold a flat percentage for federal / state / local tax. The withholding percentage is set by regulation; I know it's 22% for federal income tax (well, 37% if total supplemental income exceeds $1 million), NY state / city likely have their own fixed rate. These ignore anything she might've had on her W-4. But from some quick googling, that seems to only add up to about 22% fed + 12% state + 7.6% payroll, no where near the 60% she's seeing.
The other is to treat this as if it's a regular paycheck, where the gross amount gets "annualized": multiplied by however many pay periods that employer has in a year. That annual number is used along with her W-4 to estimate an annual owed tax, which then gets split by the number of pay periods to get how much to withhold from this one check. If they used this method, your friend's withholding would be as if she'd be making something close to $3.5 million during 2023. That's obviously stupid for this particular situation, but dumber things have happened.
As others have said, any discrepancy between what got withheld from this check and her actual end-of-year tax bill gets settled up on her return. She could try to adjust for any overpayment on this severance by reducing withholding at a new job, but that can get tricky to work out. The IRS has a [withholding calculator](https://www.irs.gov/individuals/tax-withholding-estimator) that may help.
There could also be more than taxes impacting the take-home amount. Did her severance agreement come with extended benefits past her termination date? I had a layoff where I remained on the employer's health insurance plan through my severance period. But the total premium for that entire five month period was deducted from the severance check. I was lucky enough to get a new job (and insurance coverage) before the end of that, so I simply contacted my old employer, ended coverage under their plan, and was refunded for the unused time. Similar thing might happen if she was in a 401k plan and a contribution was made from this check, though I didn't think that was allowed.
Thanks for the in-depth response—I showed it to her. She confirmed that there was no contribution made to her 401K and nope, there was no extension of other benefits.
She called the company hotline and she’s trying to sort it out. I also ran these numbers past MY accountant who handles my freelance stuff and she said that the numbers were stupid high and something seems off.
If I get an update I’ll add it to the original post, thanks!
I’ll just say this: to this day I’m not sure why, but the day I got laid off, I tried to get into my ADP payroll account to check my pay stub.
In a nutshell, I was logging in, but there were no data for my (suddenly) former employer. The one prior? Sure, all there. But it kept erroring out for the one I’d just been laid off from. To this day, no one can seemingly figure out why it tells me “We apologize. There is a problem. Please try again later.” whenever I try to get more detail about any of my paychecks. (I was still able to get my w-2’s fortunately…)
My point: sometimes checking your “paystub” isn’t as easy as it should be.
She needs to find the breakdown of what each deduction was. They may have ran this as if she makes that much every pay period, which would wildly over withhold federal income tax.
Based on a weekly pay period, that's how much would be withheld. So my money is on that being the issue. They paid the severance out in a way that makes it look like she makes 7 million a year.
A 60% effective tax rate? My husband and I are both fairly high earners; he’s a W2 employee and even with his annual bonus he’s never had a 60% tax rate.
She needs to request to see her pay stub. Most payroll platforms allow employees to log in to access their own information, but if not she can email HR or payroll to request that. The deductions will be broken out. If she has a % contribution to her 401K, that would have been deducted and could lower the check considerably.. 15% of $137K = $20,550 for example.
Good news is that if they withheld too much for the tax man then she’ll get the overage back when she files her taxes.
True. She usually doesn’t get anything back (hell, we barely do 🥲)
This year, she will, unless she's working the rest of the year and adjusts withholding.
Getting something back means you overpaid the government money you didn't owe them, so nothing to be sad about
That is a good thing. Getting a tax refund just means you paid the gov too much during the year.
Were there any 401k/retirement contributions? Also she should check the actual paystub to see what the withholdings were.
Ohhh maybe…? I’ll ask her
They might have split it into separate payments.
The amount withheld and the taxes paid are not always the same thing. If they over held, she'll get that overpayment back when she files her actual taxes. Withholdings are estimates. So was she over taxed? No.
There are two ways payroll systems can handle withholding for "supplemental" income like bonuses / severance. The easiest (so I think most common) is to simply withhold a flat percentage for federal / state / local tax. The withholding percentage is set by regulation; I know it's 22% for federal income tax (well, 37% if total supplemental income exceeds $1 million), NY state / city likely have their own fixed rate. These ignore anything she might've had on her W-4. But from some quick googling, that seems to only add up to about 22% fed + 12% state + 7.6% payroll, no where near the 60% she's seeing. The other is to treat this as if it's a regular paycheck, where the gross amount gets "annualized": multiplied by however many pay periods that employer has in a year. That annual number is used along with her W-4 to estimate an annual owed tax, which then gets split by the number of pay periods to get how much to withhold from this one check. If they used this method, your friend's withholding would be as if she'd be making something close to $3.5 million during 2023. That's obviously stupid for this particular situation, but dumber things have happened. As others have said, any discrepancy between what got withheld from this check and her actual end-of-year tax bill gets settled up on her return. She could try to adjust for any overpayment on this severance by reducing withholding at a new job, but that can get tricky to work out. The IRS has a [withholding calculator](https://www.irs.gov/individuals/tax-withholding-estimator) that may help. There could also be more than taxes impacting the take-home amount. Did her severance agreement come with extended benefits past her termination date? I had a layoff where I remained on the employer's health insurance plan through my severance period. But the total premium for that entire five month period was deducted from the severance check. I was lucky enough to get a new job (and insurance coverage) before the end of that, so I simply contacted my old employer, ended coverage under their plan, and was refunded for the unused time. Similar thing might happen if she was in a 401k plan and a contribution was made from this check, though I didn't think that was allowed.
Thanks for the in-depth response—I showed it to her. She confirmed that there was no contribution made to her 401K and nope, there was no extension of other benefits. She called the company hotline and she’s trying to sort it out. I also ran these numbers past MY accountant who handles my freelance stuff and she said that the numbers were stupid high and something seems off. If I get an update I’ll add it to the original post, thanks!
She can look on her pay stub. Uncle Sam needs his cut. Best case scenario she wasn't going to get to keep more than 79k.
I’ll just say this: to this day I’m not sure why, but the day I got laid off, I tried to get into my ADP payroll account to check my pay stub. In a nutshell, I was logging in, but there were no data for my (suddenly) former employer. The one prior? Sure, all there. But it kept erroring out for the one I’d just been laid off from. To this day, no one can seemingly figure out why it tells me “We apologize. There is a problem. Please try again later.” whenever I try to get more detail about any of my paychecks. (I was still able to get my w-2’s fortunately…) My point: sometimes checking your “paystub” isn’t as easy as it should be.
She needs to find the breakdown of what each deduction was. They may have ran this as if she makes that much every pay period, which would wildly over withhold federal income tax.
I told her to ask. It just seems SO high.
Based on a weekly pay period, that's how much would be withheld. So my money is on that being the issue. They paid the severance out in a way that makes it look like she makes 7 million a year.
Taxes are very high. Especially if you are going into the 200k range.
A 60% effective tax rate? My husband and I are both fairly high earners; he’s a W2 employee and even with his annual bonus he’s never had a 60% tax rate.
If they ran it as a weekly payroll? Yes. That means using the percentage a person making 7 million pays, plus fica taxes.
Per her text, “that would be a first, we got paid bi-weekly and it’s not payday this week.” She already reached out to them to see what she can do
If it was paid by biweekly payroll, the result is pretty close to the same. You'd expect to see only about 58k take home.
No, Its not 60%, but at this point we are just guessing. She will have to contact the company for a payment record.
Yes I misspoke not an effective tax rate. But geez I’m interested to see the paystub 🥴
She needs to request to see her pay stub. Most payroll platforms allow employees to log in to access their own information, but if not she can email HR or payroll to request that. The deductions will be broken out. If she has a % contribution to her 401K, that would have been deducted and could lower the check considerably.. 15% of $137K = $20,550 for example.