Can an employer deduct backup withholdings without my knowledge? Employer deducted backup withholdings from my foreign income that exceeded annual exemption.

[beharmon2004]

I have lived in Kenya for 10 years and my annual salary is more than $112,000.    I received a severance payment which was taxed at 22% as backup withholdings.  

[Anonymous_]

@pk

[Critter-3]

Actually the 22% amount is normal for a large paycheck like that.  When you file a return if this is too much then you will get it back in the refund.  

[pk]

@beharmon2004 , while agree with @Critter-3  that the  withholding quantum does not appear  out of bounds,  I am confused about  the whole scenario. So please could be help me here by answering the following at least:

(a) are you US person ( citizen/GreenCard )

(b) were you employed by US entity or a local entity or US govt and its subs.

(c) Where was the work done --- Kenya or here in the USA

(d) are you an employee  or a contractor for the entity ( especially if the entity is US )

Any other info that might/may throw more light on this situation---please

I will circle back once I hear from you

pk

[beharmon2004]

Hello

To answer your questions

a) I am a US citizen and also a bonified resident of Kenya

b) I am/was employed by a US-based non-profit organization

c) All my work was performed in Kenya

d) I am/was an employee. 

Here is additional information

a) I have worked for other US-based non-profit organizations from Kenya for 10 years.

b) I have always earned above the foreign income tax exclusion ($112,000 for 2022, $108,700 for 2021, $107,600 for 2020, $105,900 for 2019, and $104,100 for 2018)

c)  I worked for my most recent employer since 2018 and they never withheld taxes when I reached the foreign income tax exclusion. 

d)  Previous employers have never deducted taxes for amounts over the maximum foreign income tax exclusion.

d)  When I file my taxes, I typically owe federal taxes

e)  My most recent employer withheld 22% from my severance because the amount would put my year-to-date earnings over $112,000.

f)  I was paid for accumulated leave days, which were not taxed

Their justification for the deduction for twofold

a) When adding the severance to year-to-date earnings, I exceeded $112,000, and

b)  Severance is considered supplemental income.

So, I would like to get clarification on the following

a) Can an employer automatically withhold taxes without the employee filling out a W-4?

b)  Is severance considered supplemental income?

Thank you so much in advance.  

[Mike9241 · Accepted solution]

from IRS Circular E.

 Is severance considered supplemental income? it's supplemental wages per IRS Circular E.

7. Supplemental Wages
Supplemental wages are wage payments to an employee
that aren't regular wages. They include, but aren't limited
to, bonuses, commissions, overtime pay, payments for
accumulated sick leave, severance pay, awards, prizes,
back pay, reported tips, retroactive pay increases, and
payments for nondeductible moving expenses. However,
employers have the option to treat overtime pay and tips
as regular wages instead of supplemental wages. Other
payments subject to the supplemental wage rules include
taxable fringe benefits and expense allowances paid under a nonaccountable plan. How you withhold on supplemental wages depends on whether the supplemental payment is identified as a separate payment from regular wages. See Regulations section 31.3402(g)-1 for additional guidance. Also see Revenue Ruling 2008-29, 2008-24 I.R.B. 1149, available at IRS.gov/irb/2008-24_IRB#RR-2008-29.

If you didn't withhold income tax from the employee's regular wages in the current or immediately preceding
calendar year, use method 1b.

method 1b

If the supplemental wages are paid concurrently with regular wages, add the supplemental wages
to the concurrently paid regular wages and withhold federal income tax as if the total were a single
payment for a regular payroll period. If there are no concurrently paid regular wages, add the supplemental wages to, alternatively, either the regular wages paid or to be paid for the current payroll period or the regular wages paid for the preceding payroll period. Figure the income tax withholding as if the total of the regular wages and supplemental wages is a single payment. Subtract the tax already withheld or to be withheld from the regular wages. Withhold the remaining tax from the supplemental wages. If there were other payments of supplemental wages paid during the payroll period made before the current payment of supplemental wages, aggregate all the payments of supplemental wages paid during the payroll period with the regular wages paid during the payroll period, figure the tax on the total, subtract the tax already
withheld from the regular wages and the previous supplemental wage payments, and withhold the
remaining tax.

can't say the right amount was withheld. A w-4 is not required.