Originally Posted by
overworked
It is not taxed at 25%. What you are trying to say was that in your case, 25% was withheld. It all gets rectified when you do your taxes next month, and that will determine your tax liability. Once tax liability is determined for your yearly income, you then know if you had too much withheld in which case you get a refund.
The software that does your payroll saw that extra amount of money on that check and it thinks you are going to make (as an example), 100K a year instead of 50K, so it tries to "withhold" the appropriate amount of taxes for a person making 100k.
To sum it up, you didn't get screwed.
Because vacation pay is future earnings, it is considered a bonus and, therefore, taxed at the maximum rate per the IRS.
On regular earnings, you can have zero income taxes deducted from your regular payroll checks if you so choose. How you handle the liability then is up to you.
The payroll system makes normal deductions based on your filing status and the number of exemptions you choose. It doesn't care how much each pay check is nor does it increase withholding because of an increase in pay.