Author Topic: Stupid question - tax on bonuses...  (Read 2492 times)

dandeliongirl75

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Stupid question - tax on bonuses...
« on: December 06, 2014, 01:04:48 PM »
There seems to be a lot of confusion on this topic, which is in turn confusing me.

My understanding is as follows but many friends are telling me I pay more on my bonus than I think....can someone who knows please set me straight?

We got paid a bonus this year in one paycheck. The taxes taken out of it were very high. In my mind the bonus will just be added to the yearly total of what I make and I will get some of the taxes I paid at the time back when I file taxes (assuming I have paid the right amount of taxes for the rest of my salary). The rate paid at the time was only so high because the formula used to take taxes assumes that is what I earn every month right? The only way I would be paying extra on a bonus would be if it kicked me into a higher tax bracket and then I would only pay that rate on the part that goes into that bracket right?

I am from the UK and live in the US so sometimes I just don't get it....I am very willing to believe I am wrong on this.

MDM

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Re: Stupid question - tax on bonuses...
« Reply #1 on: December 06, 2014, 01:15:26 PM »
It's a good question.  Your perception seems correct.  It's possible that the bonus puts you into a higher marginal tax bracket so you could think of it as paying a higher tax rate on the bonus, but as you observe the bonus is really no different from the rest of your income.

It is also likely that the bonus had a flat 25% withheld, regardless of your normal salary and W-4 settings.  See reference below.  But as you said, it all comes out right when you file.

From http://www.lorman.com/resources/irs-provides-guidance-on-proper-income-tax-withholding-for-nine-common-supplemental-wage-payment-sce-15236
Quote
Regular Wages

Whether an employer is paying "regular wages" or "supplemental wages" has an impact on the amount of income taxes that should be withheld. Regular wages means wages paid by an employer for a payroll period either at a regular hourly rate or in a predetermined fixed amount. The amount that is to be withheld in the case of regular wages is based on the tax table for the pay period (e.g., bi-weekly) and the number of exemptions claimed on the employee's IRS Form W-4.

Supplemental Wages

Supplemental wages are all wages that are not regular wages. Stated differently, supplemental wages are wages that vary from payroll period to payroll period based on factors other than the amount of time worked. Examples of supplemental wages are overtime pay, bonuses, back pay, commissions, wages paid under reimbursement or other expense allowance arrangements, nonqualified deferred compensation, noncash fringe benefits, sick pay paid by a third party as an agent of the employer, amounts includible in gross income under IRC section 409A, income recognized on the exercise of a nonstatutory stock option and imputed income for health coverage for a nondependent.

If the amount of supplemental wages paid in any calendar year exceeds $1 million in the aggregate, withholding is at a mandatory 35 percent rate on the amount more than $1 million, and optional for the payment that causes the total of all supplemental wages in the year to cross the $1 million threshold. If supplemental wages are less than $1 million, the employer may generally choose to use either:

- the optional (25 percent) flat rate; or
- the aggregate method.

The optional 25 percent flat rate method may not be used, however, unless income tax has been withheld from the employee's regular wages during the calendar year of the payment of the supplemental wages or the preceding calendar year, and the supplemental wages are separately stated from regular wages (in addition to being less than $1 million).


Villanelle

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Re: Stupid question - tax on bonuses...
« Reply #2 on: December 06, 2014, 04:01:48 PM »
You will end up paying the same taxes in the long run if it were salary or tax.  So once you reconcile it all with your tax return, you'd pay the same if you made $120k in salary, or $100k in salary with a $20k bonus.    With a bonus, you paid more when you received it, but in the end, it comes out the same with a larger return (or smaller amount owed).

So it is exactly the same as regular income, minus the few months the government has the money instead of you.  This is a common misunderstanding. 

Calvawt

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Re: Stupid question - tax on bonuses...
« Reply #3 on: December 06, 2014, 04:04:22 PM »
There is a 25% suggested withholding rate on bonuses by the IRS.  It will even out at tax time.  I have to explain that to employees all the time.