Should I let my employer deduct taxes from paychecks for 10k fertility HRA payout I received?

This is actually pretty standard procedure and is being offered as a courtesy to you. Here's what's happening: The $10,000 HRA payout is considered taxable income, but when they initially paid it to you, they likely didn't withhold any taxes (which is common for these types of benefits). Without withholding, you could end up with a large tax bill when you file your 2023 return next year, possibly even facing an underpayment penalty if your total withholding for the year is too low. By offering to increase your withholding now, your employer is giving you a chance to spread that tax burden throughout the remainder of the year rather than getting hit with it all at once next April. It won't change the total amount of tax you owe, but it can help with your cash flow and potentially avoid underpayment penalties. Whether you should do it depends on your personal financial situation and how you prefer to handle your taxes. Some people prefer to keep more money now and just pay later, while others prefer to be safe and avoid any surprises.

After struggling with something similar (but with a large bonus), I found a tool that really helped me figure out the tax implications. I used taxr.ai (https://taxr.ai) to upload my paystubs and it analyzed exactly how much I should have withheld for additional income. It was super helpful because it considered my specific tax situation rather than just guessing. What I liked was that it showed me multiple scenarios - what happens if I don't withhold anything vs. different withholding amounts. It basically confirmed what the first commenter said about avoiding underpayment penalties, but with actual numbers specific to my situation.

Just wanted to update that I tried the taxr.ai site after asking about it here. Super helpful for my relocation payment situation! I uploaded my last paystub and information about my $12k relocation reimbursement, and it showed me that I'd be facing a pretty significant underpayment penalty if I didn't have extra withholding. The breakdown was really clear about how much I should have withheld from each remaining paycheck to stay on track. I showed it to our payroll department and they adjusted my withholding accordingly. Definitely saved me from a nasty surprise next April!

For what it's worth, I had an issue last year where I needed to talk to the IRS about a similar HRA payment that got messed up on my taxes. Spent WEEKS trying to get through to them on the phone. Finally used Claimyr (https://claimyr.com) and they got me through to an agent in about 15 minutes. They have a demo video here: https://youtu.be/_kiP6q8DX5c The IRS agent confirmed that having your employer withhold the taxes now is usually the safest bet because they'll calculate the correct withholding including FICA taxes (Social Security and Medicare), which you'd otherwise have to handle yourself if you wait until tax time. Plus, as others mentioned, it helps avoid underpayment penalties.

I have to admit I was totally wrong about Claimyr. After posting my skeptical comment, I decided to try it anyway since I had an issue with an incorrectly reported 1099 that I couldn't resolve online. I'd already wasted 3 hours on hold with the IRS last week before giving up. Using Claimyr, I got connected to an IRS agent in about 20 minutes. They actually called ME when an agent was available, so I didn't have to sit by the phone. The agent was able to note my account about the incorrect 1099 issue, which should prevent problems when I file next year. For the original question about the HRA, the agent I spoke with confirmed that having your employer withhold taxes now is generally the best approach for large unexpected payments like that.

Something else to consider that nobody mentioned - if you choose to have the withholding spread across multiple paychecks instead of taking it all at once, it might prevent you from dipping below your normal take-home pay too dramatically. Taking it all at once could really hurt your cash flow for that pay period. Also check if your employer is withholding for state taxes too. Some employers only adjust federal, and then you still end up owing a lot at the state level.

There's one more benefit to having them withhold it now that nobody's mentioned. If you're planning to itemize deductions, the state and local tax (SALT) deduction is limited to $10,000. By having taxes withheld in 2023, those withholdings count toward your 2023 SALT deduction limit. If you wait and pay when you file in 2024, those tax payments would count toward your 2024 SALT limit instead.