[michael23g]

Back in June 2011 I've elected to participate in early retirement program. The letter from the employer stated that the lump sum of more than a year of salary, bonus etc, is "Considered supplemental income, and, as such, taxed using the Supplemental Tax rate, which is 25% on supplemental income up to $1M".

I've, in part, based my decision to accept the packed on the fact that the lump sum will not put me into the highest bracket, thus reducing the benefits of accepting it.

Now it appeared that 25% is actually Payroll withholding percent, and has nothing to do with tax rate. And there is no such thing as "Supplemental Tax Rate".

Is there a way to to get some kind of the compensation from the employer ( Major Fortune 500) company for misleading me when making a very important life-changing decision. Where do I start?

[ebaines]

The 25% withholding rate is mandated by the IRS for special payments like this. All withholding is merely an estimated down payment on what you will actually owe come tax time. Of course there is no way your employer could know what your tax bracket is, as they don't know about your other income, deductions, exemptions, credits, etc. Your company did not mislead you - you simply didn't take into account how the additional income would affect your income tax bracket. I will say however that the tax code makes it very difficult to predict tax consequences in cases like yours - what with phase outs of exemptions and deductions and the Alternative Minimum Tax, all of which have can have the effect of making your marginal tax rate significantly higher than the published tax brackets. So perhaps your ire is best aimed at Congress and the crazy tax system it created which makes it so hard to understand the consequences in case like yours.

[michael23g]

Yes, I understand all this. But based on their statement that the lump sum is "Considered supplemental income, and, as such, taxed using the Supplemental Tax rate, which is 25% on supplemental income" - taxed, not withheld from payroll, I've expected some kind of tax form which would state that a portion of my income was "Supplemental income" and be applied properly when taxes are filed. I just think, and my CPA actually agreed with me, that the statement above is absolutely misleading, and I'm not sure that it's not on purpose - just to help the eligible employees to make a decision. "Taxed at Rate" is not the same as "Taxes withheld at rate"

[ebaines]

I see your point - it is poorly worded. But I really doubt that it was done intentionally to mislead, as it seems like a pretty subtle way to influence employee's decision. Since the vast majority of people pay less than 25% federal tax if anything this strategy would be intended to influence people to stay, not go. The term "supplemental wages" is actually used by the IRS for these types of payments, so it was appropriate for them to use that term in their document. The rules for withholding 25% on suppplemental income are outlined in Section 7 of IRS Pub 15: Publication 15 (2012), (Circular E), Employer's Tax Guide If you had asked your CPA what the tax consequences of the lump sum would be I'm sure he would have made it clear that there isn't a separate tax rate for "supplemental income." Sorry, but I really don't think you have a case.