I got a bonus and I'm trying something new

[Zman]

I received a few bonus awards at work for being a bad ass and the total monetary amount is about $2850. Being a new mustachian I immediately started wondering about how to save, where to invest, how much its being taxed, etc.

I looked up a previous award from last year: $1,000 award... total increase in paycheck $562.

WAIT... WTF!?!?!

So I will see taxes take 43.8% of my award? $1,248? Eff that, I've come up with a way to beat it (I THINK)

I calculated(after medicare, sdi, social sec.) how much I made per paycheck and added $2,850 to it. Then... I upped my contribution to my retirement by that much. I left a couple dollars as a buffer, but if all goes well I would have not been taxed on any of the $2850 and have put 2 weeks of pay into retirement!
(This works because I  am still a ways off from the $18,000 yearly retirement limit)

So I will live off some savings I have for the next few weeks and hopefully see a $10 paycheck coming my way with a couple bucks being taxed on it.

If you have read this far and think I am missing something or know of a reason this wont work / is stupid, please let me know.  Until then I will continue to feel like a bad ass

[Gone Fishing]

Stuffing extra cash back is always a good thing!  Should work fine, just don't forget that 43.8% is the withholding rate, not the tax rate.  Withholding is usually high on bonuses because the formula assumes you make that every pay period, which you don't.  Everything gets settled when you file your tax return and any excess withholdings get returned to you in the form of a refund.  That said, it is generally advantageous to adjust your withholdings to minimize your refund so you can put the money to work in the meantime.

[mom22boys]

I calculated(after medicare, sdi, social sec.) how much I made per paycheck and added $2,850 to it. Then... I upped my contribution to my retirement by that much. I left a couple dollars as a buffer, but if all goes well I would have not been taxed on any of the $2850 and have put 2 weeks of pay into retirement!

This won't work....which I think is what So Close is also saying. They ALWAYS take out taxes on the bonus before any contributions to your retirement plans. There was another thread on this not too long ago (sorry can't find it). But, remember that you will likely get a lot of this back on your tax returns.

[mom22boys]

Here's the other thread to read:  http://forum.mrmoneymustache.com/taxes/question-about-bonuses-and-taxes/

[johnny847]

I calculated(after medicare, sdi, social sec.) how much I made per paycheck and added $2,850 to it. Then... I upped my contribution to my retirement by that much. I left a couple dollars as a buffer, but if all goes well I would have not been taxed on any of the $2850 and have put 2 weeks of pay into retirement!

This won't work....which I think is what So Close is also saying. They ALWAYS take out taxes on the bonus before any contributions to your retirement plans. There was another thread on this not too long ago (sorry can't find it). But, remember that you will likely get a lot of this back on your tax returns.

That is the key takeaway that many people misunderstand.
Bonuses are withheld at a higher rate because for every paycheck (assume a semimonthly paycheck), they assume your salary will be 24*paycheck when they calculate withholding. However, your bonus is not taxed at some special rate. If you think it is, look at a W-2 and please find a box marked bonuses, or something to that effect.
Your bonus is not taxed at some special rate. It is taxed at the exact same rate as all of your other income. The excess withholding will be accounted for when you file your taxes.

[Zman]

Here's the other thread to read:  http://forum.mrmoneymustache.com/taxes/question-about-bonuses-and-taxes/

THANK YOU! :-(

[RangerOne]

A company will tell you if a bonus or profit share is eligable t be dumped straight into a 401k thus usually avoiding immediate tax. I know this is true of profit shares. Maybe they never do that if it gets classified as a bonus...

Like others have said though it is largely irrelevant. Your check taxes will look high but you need to think of it in terms of what you are making for the year. Its just another chunk of money on the top end of your pay scale. Its up to the company how it fairly the money is withheld for tax purposes but it all works out the same in the end.