14

Preface: all the numbers provided are fictional, but refer to the real situation

I started recently with the new job, where accounting manager indicated that checks are biweekly. As I started at the end of the month, I got my first paycheck only for the first week of work, which equals ($5 (per hour) * 40 (actual working hours)) * 0.24 (total tax deduction) = $152. When I received next biweekly check it only was $284 instead of expected $302. Once calculated I came up with being deducted not my usual 24% tax deduction, but 29%. So I'm little confused here:

  1. Should the tax deduction amount be fixed regardless of the payment frequency?
  2. Should I be asking my accounting manager to switch me to a weekly pay basis (where apparently I'll be making more money each month)?
  • @Nathan L Thanks for editing my original question. It looks more concise and accurate. – Tired Of Trading Aug 18 '17 at 15:34
  • Possible duplicate of money.stackexchange.com/questions/62574/… – user662852 Aug 18 '17 at 15:39
  • So I finally contacted my accounting manager, that told me they are using third party company to calculate all the payments and direct deposit amounts. The representative from that firm told my accounting manager that she doesn't know about those weekly - biweekly pay checks differences, and that everything done in software application that they use (apparently not the clearest answer ever). Still waiting from more precise response from them, meanwhile thinking to ask to a rate increase in order to meet my monthly salary expectations. – Tired Of Trading Aug 18 '17 at 19:38
  • You should figure out what your taxes will be assuming zero withholding, then figure out what the right withholding amount for you is. Then, if they're withholding significantly more or less than that, give them an updated W4. – David Schwartz Aug 18 '17 at 22:07
25

Many payroll systems calculate tax withholding based on the period (in isolation), as if what you earned that period is what you will earn every period for the year. They basically say, this period's income x number of periods in year puts you in this tax bracket, so we'll withhold based on that.

So working a partial period will mean they might withhold at a lower rate. They under-withheld your first check, you wouldn't get more money by getting paid weekly.

Ostensibly if paid weekly you could be earning a small amount of interest that would put you slightly ahead of less frequent pay periods, but from an income and tax perspective, pay frequency has no impact.

  • Thanks for the response. From my understanding if I get paid daily, I can get even more $$ yearly? – Tired Of Trading Aug 18 '17 at 14:27
  • 9
    No, the frequency of pay doesn't affect the total pay, it's just that they under-withheld on your first check. The issue was you working a partial pay-period and them calculating as if it were a full period. – Hart CO Aug 18 '17 at 14:28
  • 2
    To put it a different way, you aren't getting more (net) income, but less taxes removed. At the end of the year, it would balance out (with your tax refund process) – eques Aug 18 '17 at 20:00
  • The taxes will come out the same in the end. If you want more money now, and to pay more taxes later, reduce your with-holdings. The one-week vs two-week difference in calculation is just a minor artifact of estimating your taxes, and tax bracket. But you will still owe the same amount of tax at the end of the year regardless of pay periods. Much easier to adjust withholdings than change your pay cycle, if you want more control over your cash flow. Neither save you (ultimately) in taxes. – JesseM Aug 18 '17 at 22:22
  • 1
    I was explained by the third party vendor representative that controls all the payment activities for my company that the more working hours I report, the more tax deduction percentage is applicable. From my understanding this is still unclear at it makes more sense for me to get paid weekly, where I'll be making more $$$ and not that much I get my returns from IRS. Thanks everyone who participated in the discussions. – Tired Of Trading Aug 21 '17 at 15:31
8

Keep in mind that tax withholdings will be reconciled when you file, so if you "get more" today, that may results in a larger tax bill when you file, and vice-versa. Your total tax paid for the year will be calculated based on your gross pay, so how much is withheld only determines the amount of your tax bill (or refund) when you file.

That said, withholdings are determined based on the amount of taxable income and the length of the pay period, extrapolated out to a full year. I'm a bit surprised that the tax is not exactly double what is was for the weekly period. Spot-checking the withholding tables, the withholding amounts for bi-weekly pay are exactly double the equivalent weekly pay.

I would check with your payroll/accounting department to make sure nothing else has changed (status, exemptions, etc.) but if the pay is exactly the same then the tax should be the same (per week) as well.

Should the tax deduction [percentage] be fixed regardless of the payment frequency?

If your income is not exactly double what is was for the weekly paycheck, then the percentage could very well be different since the additional tax for more pay will be at a higher rate than the average due to the graduated tax brackets (e.g. you are not taxed at all on the first X dollars (depending on status and dependents), the next X dollars are taxed at 15%, the next X dollars taxed at 25%, etc.). So the percentage withheld will NOT be constant if the gross pay (or any deductions) are not constant.

  • @D Stanley Thanks for the advise Stanley. I will definitely ask the accounting manager about those differences in pay amounts. – Tired Of Trading Aug 18 '17 at 15:31
  • It's also possible that your payroll system defaults to a specific number of exemptions for new employees, which is likely to be updated after they receive a completed W-4 from you. That would change withholding amounts in pay periods after the first (even if the pay periods are the same length). – CactusCake Aug 18 '17 at 15:42
  • @CactusCake Your point is absolutely make sense. But in my situation I filled out my electronic W4 form and submitted it online to the employer waaay before I started actual work. The thing is that I've always been deducted with 24% at all my previous companies, and that makes me wonder why the increase came up to scene. – Tired Of Trading Aug 18 '17 at 16:12
6

I suspect the answer is very simple -- the accounting system didn't bother to compute tax withholding for the first paycheck based on one week of work -- it computed based on two weeks of work. That is, it assume that every paycheck for the rest of the year would match the first paycheck... and looking forward it decided 24% was right. Then, next paycheck, when it saw your pay double, it recalculated and decided 29% was right.

  • That might be the case as well. But there is a whole implantation of AI system here to the simple electronic accounting tool :-) I would assume this must be a very expensive tool.... – Tired Of Trading Aug 18 '17 at 16:38

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.