Remember your first paycheck and how shocked you were when you noticed how much was being taken out for taxes?  My son had the shock of his life when he saw his first paystub for his summer internship at Textron, Inc.   Although he instructed his HR department to withhold the minimum amount out of his paycheck due to his small amount of income (he is getting paid $16.50/hr.), his effective Federal tax rate was well over 20%.

It turns out that his housing and relocation subsidy of $2,500 had an automatic withholding of 25%.  Per federal tax law, if you have any supplemental wages, outside of your regular salary, the federal government can withhold taxes at a different rate.  Supplemental wages generally include commissions and bonuses, sick leave payments, reimbursements of nondeductible moving expenses, and taxable fringe benefits.  There are two methods of withholding, but if the supplemental wages are paid separately, they may be taxed at the IRS flat supplemental rate which is 25 percent. Supplemental wages are also subject to Social Security, Medicare, and FUTA taxes.

So in my son’s case, since the company paid him a lump sum of $2,500 for relocation expenses, that amount had 25% automatically deducted from his first paycheck.  Going forward, he will have a lower amount withheld, and then he will get a large refund when files his 2014 tax return.  My son was not happy that he would have to wait for the tax refund, but he will ultimately get most of this money back in the end.  For more info on supplemental wages click here.