I received a 3% raise retro active from 01/01/09. My employer taxed it at the gift tax rate. Is this legal? Should it not have been taxed as regular income at the individual tax rate?
By Deirdre from New York, NY
Well you could call or e-mail visit the nearest the IRS office. They would know better than anyone else.
The only tax that would be in question is income tax. FICA is a flat rate and is capped anyhow, and Medicare you pay on everything you make at a flat rate. If you overpaid your taxes, you'll be getting back what you overpaid when you file your 2009 tax return(s). Also, if you were paid in a lump sum, most payroll software does not recognize that a payment is for a year's worth of payroll. It thinks you make that every week. So yes, your income tax withheld may be a huge amount in this payment, but as long as it was calculated with your regular exemption status, I don't think it's illegal. I think it would be far worse to find out they didn't withhold enough and you OWED a huge sum.
I am curious if your paycheck stub actually said 'gift tax' but irregardless of whether it did or didn't income tax is income tax! Be thankful your employer paid retro pay and deducted the taxes so you won't get a shock that you owe taxes when you file and especially if you don't have cash on hand if you did owe because if you don't have cash on hand you would have to pay penalties and interest to the IRS! If you're entitled to a refund you'll receive one and, if not, thank your lucky stars and thank your lucky stars that you even have a job!
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