Help understanding tax math

[kdonnel]

My work has a health rewards program.

Last quarter I cashed out $130 in rewards as an Amazon gift card. It got reported as income, as expected, in today's paycheck.

The unexpected was the fact it was taxed to the point that my take home pay dropped by $61.

How??????

How can earning an additional $130 result in $191 in additional federal and state taxes?

With our system of graduated tax brackets I don't see one listed for 147%.

 

[Marrila]

.

 

[CaptainAmerica]

My work has a health rewards program.

Last quarter I cashed out $130 in rewards as an Amazon gift card. It got reported as income, as expected, in today's paycheck.

The unexpected was the fact it was taxed to the point that my take home pay dropped by $61.

How??????

How can earning an additional $130 result in $191 in additional federal and state taxes?

With our system of graduated tax brackets I don't see one listed for 147%.

Your take home pay didn't drop by $61, your CASH pay dropped by $61, but you also got $130 in a cash-equivalent gift card.

+130 gift card
(61 additional taxes)
= 69 net increase in cash and cash equivalents

 

[shh]

Not that this adds any value to the thread or your question, but gotta say I'm jealous of your rewards program. We get a useless prepaid card that has so many restrictions and so few places it can be used that it's virtually useless. It sits in my drawer. I'd love cash rewards.

 

[lanejudy]

They tax the heck out of those kinds of "extras" -- it isn't at your regular rate by just adding to your regular pay, the extra is taxed separate from your regular pay. Most years I get a bonus, and occasionally an award, and I submit for reimbursements through the wellness program. I usually end up netting just over half for any of those -- between federal and state taxes probably combined at least 45%.

 

[kdonnel]

Your take home pay didn't drop by $61, your CASH pay dropped by $61, but you also got $130 in a cash-equivalent gift card.

+130 gift card
(61 additional taxes)
= 69 net increase in cash and cash equivalents

My take home pay dropped by $61. The amount of money direct deposited.

There is a line item on the paystub in the earnings section titled VP Gift Card for 130. My gross pay increased by $130 this pay period.

There is a line item on the paystub in the Deductions Statutory section titled VP Gift Card for $130. A deduction of $130 was taken from my gross earnings.

The Federal, State, Medicate, and SS Tax deductions increased by $61 total.

 

[kdonnel]

There is also this awesome disclaimer in the app.

I thought 401k contributions were pre-tax?

And we are in May. Seems like this should not have occurred until July according to the disclaimer.

 

[Allison]

My take home pay dropped by $61. The amount of money direct deposited.

There is a line item on the paystub in the earnings section titled VP Gift Card for 130. My gross pay increased by $130 this pay period.

There is a line item on the paystub in the Deductions Statutory section titled VP Gift Card for $130. A deduction of $130 was taken from my gross earnings.

The Federal, State, Medicate, and SS Tax deductions increased by $61 total.

So ultimately the reward card was taxed at around 46% in total. The paystub shows the increase to income and that it was paid out through a reward card. The change in the cash balance is to cover all the taxes.

 

[lanejudy]

There is also this awesome disclaimer in the app.

I thought 401k contributions were pre-tax?


View attachment 668887

Yes 401K is pre-tax, so using the example if $10 of the $130 went to your 401K the federal tax was calculated as if the gift card was $120.

 

[kdonnel]

So ultimately the reward card was taxed at around 46% in total. The paystub shows the increase to income and that it was paid out through a reward card. The change in the cash balance is to cover all the taxes.

That makes sense.

 

[CaptainAmerica]

My take home pay dropped by $61. The amount of money direct deposited.

There is a line item on the paystub in the earnings section titled VP Gift Card for 130. My gross pay increased by $130 this pay period.

Yes but the $130 is noncash.

 

[Allison]

There is also this awesome disclaimer in the app.

I thought 401k contributions were pre-tax?


View attachment 668887

Yes, the contribution would be pre-tax. They are giving an example for a $100 gift card. If an employee contributes 10%, they will take 10% of the value of the gift card and put that towards the 401k. It would be on a pre-tax basis.

 

[Allison]

That makes sense.

It can be confusing for employees who may think they are ending up with less since the amount deposited for a pay period goes down but you have to add in the value of what was received outside of the payroll process to have the full context of it.

 

[CaptainAmerica]

As a separate matter, giving employees supplemental comp in the form of gift cards is a tremendous headache and no good for the employee or the company. If they had simply given you a spot bonus of $125 cash, you and they would have both been better off.

 

[kdonnel]

Yes but the $130 is noncash.

I was not thinking about how the $130 needed to be reflected on the paystub for tax purposes but not as cash since I have already received the $130.

 

[CaptainAmerica]

 

[kdonnel]

It can be confusing for employees who may think they are ending up with less since the amount deposited for a pay period goes down but you have to add in the value of what was received outside of the payroll process to have the full context of it.

When I worked for the same parent company but different operating company, they always plussed up the reward at taxing time so that there was no tax liability visible to the associate

 

[CaptainAmerica]

When I worked for the same parent company but different operating company, they always plussed up the reward at taxing time so that there was no tax liability visible to the associate

They can't do that, that would be a felony.

If they want to give you $100 so that you have $100 after taxes, they can do that. But they still have to fully report it as $150 of compensation, less ($50) taxes withheld. They can't just hide the tax liability.

 

[kdonnel]

They can't do that, that would be a felony.

If they want to give you $100 so that you have $100 after taxes, they can do that. But they still have to fully report it as $150 of compensation, less ($50) taxes withheld. They can't just hide the tax liability.

Maybe I am explaining it wrong.

If the gift card was for $130, the would give you the $130 gift card, then when taxed they would give you additional as cash in your check so that when taxed on the $130 and the additional given your take home pay was the same or within a few cents. They didn't hide anything.

Is that not unlike the lottery games that say $1,000,000 taxes paid as the prize? You truly win more and the end result is $1,000,000....

 

[Kennywood]