Author Topic: Why 35% tax on my bonus payment?  (Read 5204 times)

FamilyGuy

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Why 35% tax on my bonus payment?
« on: March 09, 2018, 05:42:03 AM »
my bonus : 25,153.00
401k deduction : 1,509.18 (to match company's 6%)
taxes: 8,449.85
Final check: 15,193.97

Taxes breakdown:
OASDI 1,559.49
Medicare 364.72
Federal Withholding 5,201.64
State Tax - NC 1,324.00

I'm curious why am I taxed at almost 36% when my regular paychecks are taxed at 22%?

matchewed

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Re: Why 35% tax on my bonus payment?
« Reply #1 on: March 09, 2018, 05:46:22 AM »
Ask your payroll.

MrUpwardlyMobile

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Re: Why 35% tax on my bonus payment?
« Reply #2 on: March 09, 2018, 05:52:44 AM »
my bonus : 25,153.00
401k deduction : 1,509.18 (to match company's 6%)
taxes: 8,449.85
Final check: 15,193.97

Taxes breakdown:
OASDI 1,559.49
Medicare 364.72
Federal Withholding 5,201.64
State Tax - NC 1,324.00

I'm curious why am I taxed at almost 36% when my regular paychecks are taxed at 22%?
. Many payroll companies tax the payment as though that is the amount you always get.  It avoids under withholding over the year.  Unfortunately, it causes over withholding on your bonus payment.

On the bright side,  you ought to find yourself getting a bunch of that money back on your tax return.  I received almost 7k back due to that exact situation.  Itís normal.  Most people donít notice because their bonuses are not substantial enough to be noticeable.

Jenny1974

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Re: Why 35% tax on my bonus payment?
« Reply #3 on: March 09, 2018, 06:55:51 AM »
Bonuses are subject to supplemental withholding at a flat rate of 22% for federal income tax.  Once you add SS, medicare, and any state tax withholding, it gets to over 30% real quick.

oldmannickels

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Re: Why 35% tax on my bonus payment?
« Reply #4 on: March 09, 2018, 06:58:24 AM »
my bonus : 25,153.00
401k deduction : 1,509.18 (to match company's 6%)
taxes: 8,449.85
Final check: 15,193.97

Taxes breakdown:
OASDI 1,559.49
Medicare 364.72
Federal Withholding 5,201.64
State Tax - NC 1,324.00

I'm curious why am I taxed at almost 36% when my regular paychecks are taxed at 22%?

Important distinction that is not the rate at which you are being taxed. That is the percentage withholding that is being withheld by the payroll company.

Gone Fishing

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Re: Why 35% tax on my bonus payment?
« Reply #5 on: March 09, 2018, 07:02:38 AM »
If you are confident and capable in your ability to project your tax liability for the year, you can probably adjust your withholding down now to recoup the extra taxes withheld rather than waiting until tax time. 

FamilyGuy

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Re: Why 35% tax on my bonus payment?
« Reply #6 on: March 09, 2018, 07:36:55 AM »
Thank you all. Looks like I can expect a good tax refund next year!!

catccc

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Re: Why 35% tax on my bonus payment?
« Reply #7 on: March 09, 2018, 08:04:59 AM »
Many payroll companies tax the payment as though that is the amount you always get.  It avoids under withholding over the year.  Unfortunately, it causes over withholding on your bonus payment.

On the bright side,  you ought to find yourself getting a bunch of that money back on your tax return.  I received almost 7k back due to that exact situation.  Itís normal.  Most people donít notice because their bonuses are not substantial enough to be noticeable.

It's not because the payroll company withholds from it like you'd get it all year, it's because the IRS rules require bonuses have taxes withheld at a specific rate, and that rate (22% for most) may exceed your usual withholding

Hate to burst the bubble, but from what I understand:

If your highest tax bracket in 2018 is over 22%, you might not get a refund on a cent of the $5.2K for federal income tax you just paid in, unless you have other things going on that would reduce your tax liability. (Lots of itemized deductions, low earning spouse, capital losses, etc...)

There is a max OASDI (only taxed on first $128.4K of income), and if you hit it, they'll stop withholding, typically.  So you won't see any of that back, but you may see them stop taking it once your income exceeds $128,400.

And there is no max to Medicare, so you won't see any of that, either.

I'm unfamiliar with NC state taxes so I can't comment on that.

Also, bonus withholding was 25% for years.  I guess it is 22% now due to recent legislation.  So it could be worse.

bluebelle

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Re: Why 35% tax on my bonus payment?
« Reply #8 on: March 09, 2018, 09:37:06 AM »
I always find it interesting to hear the differences between Canadian and US tax/payroll treatment.  My bonus is treated like I make that amount each pay, and taxed accordingly.  We have no option to change our tax withholding, except if you fill out forms every year that contribtuion for RRSP contributions....ours is a high tax country and a nanny state, government wants to insure that they get our money (and use it tax free for as long as possible), so we don't get to reduce the tax withholding, it's set for us.

couponvan

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Re: Why 35% tax on my bonus payment?
« Reply #9 on: March 09, 2018, 09:48:34 AM »
Depending on your tax bracket, you may actually need to save more out of your bonus. If you are subject to AMT, the amount due could be much higher.  Bonuses under $1M are taxed at the 22% amount flat rate. 

We have to make sure to withhold extra for AMT or we get a nasty penalty come tax time.

Scortius

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Re: Why 35% tax on my bonus payment?
« Reply #10 on: March 09, 2018, 10:55:01 AM »
It makes sense that end-of-year bonus payments are withheld at higher rates. Your regular paycheck withholdings are easy to predict and thus calculate. An end-of-year bonus by nature will not have been accounted for through your regular withholdings and thus it is reasonable to assume it will all be taxed at your highest marginal rate (or even higher tiers). Because the IRS would like to avoid being owed money at the end of the year, it makes sense that they would conservatively withhold extra from these payments with the expectation of returning any excess to you once you file your taxes. In the end, your bonus payments will be taxed as regular income.

MDM

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Re: Why 35% tax on my bonus payment?
« Reply #11 on: March 09, 2018, 11:04:56 AM »
Line by line:

Bonus = 25,153.00.  All of that is subject to SS and Medicare tax, so
  Soc. Sec. (aka OASDI): 25153 * 6.2% = 1559.49
  Medicare: 25153 * 1.45% = 364.72

Federal and NC state income tax based on after-401k amount, or 25153 - 1509.18 = 23643.82
  Federal: 23643.82 * 22% (the supplemental rate mentioned by other posts) =  5201.64
  State Tax: 23643.82 * 5.599% (the supplemental rate used by NC, then rounded to the nearest whole dollar) =  1,324

And, again, withholding for income tax and actual income tax due are not the same things.

MrUpwardlyMobile

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Re: Why 35% tax on my bonus payment?
« Reply #12 on: March 09, 2018, 08:27:30 PM »
Many payroll companies tax the payment as though that is the amount you always get.  It avoids under withholding over the year.  Unfortunately, it causes over withholding on your bonus payment.

On the bright side,  you ought to find yourself getting a bunch of that money back on your tax return.  I received almost 7k back due to that exact situation.  Itís normal.  Most people donít notice because their bonuses are not substantial enough to be noticeable.

It's not because the payroll company withholds from it like you'd get it all year, it's because the IRS rules require bonuses have taxes withheld at a specific rate, and that rate (22% for most) may exceed your usual withholding

Hate to burst the bubble, but from what I understand:

If your highest tax bracket in 2018 is over 22%, you might not get a refund on a cent of the $5.2K for federal income tax you just paid in, unless you have other things going on that would reduce your tax liability. (Lots of itemized deductions, low earning spouse, capital losses, etc...)

There is a max OASDI (only taxed on first $128.4K of income), and if you hit it, they'll stop withholding, typically.  So you won't see any of that back, but you may see them stop taking it once your income exceeds $128,400.

And there is no max to Medicare, so you won't see any of that, either.

I'm unfamiliar with NC state taxes so I can't comment on that.

Also, bonus withholding was 25% for years.  I guess it is 22% now due to recent legislation.  So it could be worse.
  Youíre over simplifying by assuming all bonuses are actually characterized as bonuses.  Many jobs have ďbonusesĒ that are not characterized as such for tax withholding purposes. Lawyer quarterly fee sharing with associates and of counsel from a firm being a classic example and where bonuses and wages blend and arenít always characterized as a bonus.