What Are These Taxes?

Q. I just started as a temp through an agency.  I work full-time and just received my first paycheck.  I want to ask about the OASDI and the NY 2010-NYCNY withholdings.  I was taxed heavily for the OASDI.  What is the NYCNY withholding? Most importantly, I wanted to ask you is there any way to check whether I had overpaid for taxes in a paycheck?

A. The items that came out of your check look completely appropriate.  The most common questions from employees to payroll departments about paychecks come from the cryptic descriptions of deductions shown on the paystub.  In your case, OASDI is the abbreviation for “Old age, survivors, and disability insurance.”  This is the official name for Social Security.  It is calculated as 6.2% of taxable wages up to a maximum of $106,800.  This means, you can pay up to $6,621.60 this year towards this tax.  Your employer(s) will also match 6.2% of your taxable wages.  For lower income individuals, this tax can be the highest amount taken from the paycheck.  There is another tax that is closely associated with this called Medicare.  It is 1.45% of all taxable wages.

NYCNY looks like New York City Tax.  All residents of New York City get to pay an extra tax.  Rates on this tax range from 1.9 to 4% depending on your level of income.

As for your last question, there are only three ways to determine the correct amount of withholding.  First, you download withholding formulas from each jurisdiction in which you owe tax and run hand calculations to see what is correct.  Since that is time consuming and too difficult for most of us, I recommend the second method.  PaycheckCity.com has a free Salary Calculator that calculates all your taxes for you using the formulas from each jurisdiction.  You simply need to know what settings are on the W-4 Form you gave to the payroll department.

Most importantly, if you have specific questions about your paycheck, your payroll department should be able to assist you as long as you are not asking for tax advice.

401(k) Early Withdrawal

Q. I borrowed $15,000 from my 401(k) in Feb, 09. In May, 09, I was laid off from my job. My only options for the loan were to pay it in full (not going to happen) or default. They would NOT allow me to continue making payments and would not transfer the loan to my new employer!  Anyway, can you tell me how to calculate the penalty that I will be charged when i file my taxes for 2009?

A. Generally, the fees charged for early withdrawal amount to a 10% penalty.  Sometimes the vendor of the company’s 401(k) plan will take the 10% penalty from the proceeds when someone cashes out a plan.  However, in your situation, there was no way to know this would eventually be considered a cash out.  Because the contribution to the plan is pre-tax for federal purposes, you will pay regular income tax on the withdrawal as well.  This means the calculation of total income on your tax return for 2009 will include the loan balance that was forgiven.  Your taxable income will be higher than it would have been without this dollar amount.  How much higher is to be calculated between you and your accountant or tax preparer. You can run a calculation for estimated annual liability using Publication 919 from the IRS. Beware!!! This process is like completing a simulated tax return.  If you miss one number in your calculation, the whole thing could be wrong.  This of course does not help you find your tax liability number.

If you find after working through Publication 919 that you will be short on your tax liability payments, you can adjust your withholding with your new employer for the remaining periods in the year.  This is a good idea to ensure that you don’t have any underpayment penalties at tax time.  Also, you can estimate what your check would look like using any changes you might make to your withholding allowances using the free Paycheck Calculator at PaycheckCity.com.