Comments on: Why Are Bonuses So Heavily Taxed? http://www.pfadvice.com/2007/03/09/why-are-bonuses-so-heavily-taxed/ Bridging the gap between saving money and investing Wed, 20 Aug 2008 12:30:01 +0000 http://wordpress.org/?v=2.3.2 By: Andi http://www.pfadvice.com/2007/03/09/why-are-bonuses-so-heavily-taxed/#comment-375269 Andi Mon, 28 Jul 2008 01:19:11 +0000 http://www.pfadvice.com/2007/03/09/why-are-bonuses-so-heavily-taxed/#comment-375269 Hi, Posting this because I went through at least a dozen message boards like this about bonus taxation before I found the end-all be-all documentation explaining the logic of paycheck tax withholding: www.irs.gov/pub/irs-pdf/p15.pdf Bonus information can be found starting on p.13 under Supplemental Wages. My husband was taking home only about 30% of his monthly bonuses, which are small relative to his salary. Since we're married filing jointly and both work, he had needed to calculate a number for line 6 of his W-4 (Additional amount, if any, you want withheld from each paycheck). A worksheet gives you a lump annual amount, and you're supposed to divide that by the number of paychecks in a year. Since his bonuses are treated like 12 extra paychecks, this same additional amount was being deducted from his bonus checks. Also the amount withheld from each paycheck was too high anyways because the total had been divided by 26 paychecks in a year instead of 38. This calculator was also helpful: http://www.irs.gov/individuals/article/0,,id=96196,00.html If your withholding is out of whack, this tells you exactly what to do to your W-4 to make sure that you've paid in the correct amount by the end of the year. It's also run by the IRS, so it feels more reliable to me than the link in the main post. Hi,
Posting this because I went through at least a dozen message boards like this about bonus taxation before I found the end-all be-all documentation explaining the logic of paycheck tax withholding:
http://www.irs.gov/pub/irs-pdf/p15.pdf
Bonus information can be found starting on p.13 under Supplemental Wages.
My husband was taking home only about 30% of his monthly bonuses, which are small relative to his salary. Since we’re married filing jointly and both work, he had needed to calculate a number for line 6 of his W-4 (Additional amount, if any, you want withheld from each paycheck). A worksheet gives you a lump annual amount, and you’re supposed to divide that by the number of paychecks in a year. Since his bonuses are treated like 12 extra paychecks, this same additional amount was being deducted from his bonus checks. Also the amount withheld from each paycheck was too high anyways because the total had been divided by 26 paychecks in a year instead of 38.
This calculator was also helpful:
http://www.irs.gov/individuals/article/0,,id=96196,00.html
If your withholding is out of whack, this tells you exactly what to do to your W-4 to make sure that you’ve paid in the correct amount by the end of the year. It’s also run by the IRS, so it feels more reliable to me than the link in the main post.

]]> By: Duane http://www.pfadvice.com/2007/03/09/why-are-bonuses-so-heavily-taxed/#comment-330334 Duane Fri, 06 Jun 2008 15:51:34 +0000 http://www.pfadvice.com/2007/03/09/why-are-bonuses-so-heavily-taxed/#comment-330334 Can I request that the taxes not be with held? If so where can I find this in the tax code? Thanks, Can I request that the taxes not be with held? If so where can I find this in the tax code?

Thanks,

]]> By: Martina Riordon http://www.pfadvice.com/2007/03/09/why-are-bonuses-so-heavily-taxed/#comment-259297 Martina Riordon Mon, 03 Mar 2008 19:46:50 +0000 http://www.pfadvice.com/2007/03/09/why-are-bonuses-so-heavily-taxed/#comment-259297 Do you happen to know if "commission" is considered the same as a bonus? Do you happen to know if “commission” is considered the same as a bonus?

]]> By: David http://www.pfadvice.com/2007/03/09/why-are-bonuses-so-heavily-taxed/#comment-256847 David Sat, 01 Mar 2008 00:14:56 +0000 http://www.pfadvice.com/2007/03/09/why-are-bonuses-so-heavily-taxed/#comment-256847 What about a gift turned into a bonus? An anonymous donor gave my employer (a non-profit) a check designated as a gift for me. My employer chose to call it a bonus and processed it through payroll. Is that proper? As I expected, the payroll person miscalculated the aggregate tax so a huge chunk was withheld. I used to do payroll, so I know how to tell the software that large one-time payments such as bonuses or retro salary increases ARE NOT part of one's regular salary so it's not fooled into putting you into a higher tax bracket. I hate when others don't! Incompetent. On top of that, my employer didn't want to get stuck with the employer-paid portion of FICA--SS & Med. (an employer has to pay another 7.65% on your salary, just like the 7.65% that is withheld from the employee's pay) so they reduced the gross amount of the total gift. argh. Do I need to pay a payroll attorney to figure this out? I hate to look a gift horse in the mouth, but I want to make sure it's handled properly. Thanks! What about a gift turned into a bonus? An anonymous donor gave my employer (a non-profit) a check designated as a gift for me. My employer chose to call it a bonus and processed it through payroll. Is that proper? As I expected, the payroll person miscalculated the aggregate tax so a huge chunk was withheld. I used to do payroll, so I know how to tell the software that large one-time payments such as bonuses or retro salary increases ARE NOT part of one’s regular salary so it’s not fooled into putting you into a higher tax bracket. I hate when others don’t! Incompetent. On top of that, my employer didn’t want to get stuck with the employer-paid portion of FICA–SS & Med. (an employer has to pay another 7.65% on your salary, just like the 7.65% that is withheld from the employee’s pay) so they reduced the gross amount of the total gift. argh. Do I need to pay a payroll attorney to figure this out? I hate to look a gift horse in the mouth, but I want to make sure it’s handled properly. Thanks!

]]> By: Emilio http://www.pfadvice.com/2007/03/09/why-are-bonuses-so-heavily-taxed/#comment-200049 Emilio Thu, 03 Jan 2008 16:17:09 +0000 http://www.pfadvice.com/2007/03/09/why-are-bonuses-so-heavily-taxed/#comment-200049 Is anyone out there familiar with the rules for starting bonuses? What happens if you receive a starting bonus (on which you are taxed) but decide not to take the job and have to bay that bonus back to the company? Do you have to pay the part that was witheld for taxes or just the part that you received? For example, if your starting bonus is $5,000, you get approx. $3,000 after taxes. In the case of not taking the job, what value do you repay the company? The full $5,000 or just the $3,000? Thank you! Is anyone out there familiar with the rules for starting bonuses? What happens if you receive a starting bonus (on which you are taxed) but decide not to take the job and have to bay that bonus back to the company? Do you have to pay the part that was witheld for taxes or just the part that you received?

For example, if your starting bonus is $5,000, you get approx. $3,000 after taxes. In the case of not taking the job, what value do you repay the company? The full $5,000 or just the $3,000?

Thank you!

]]> By: Teri http://www.pfadvice.com/2007/03/09/why-are-bonuses-so-heavily-taxed/#comment-81730 Teri Tue, 31 Jul 2007 21:23:16 +0000 http://www.pfadvice.com/2007/03/09/why-are-bonuses-so-heavily-taxed/#comment-81730 Will - I am a little confused by the question. As a whole though sometimes we issue $0 checks for varying situations (maybe something should have been ran through payrol but wasn't - a benefit or something). I think this could be another explanation. But I don't know, I would have to know more. I would ask your former employer for an explanation. I don't think they necessarily owe you anything - it should all work out in the end. But they would be better to explain than anyone else. Will - I am a little confused by the question. As a whole though sometimes we issue $0 checks for varying situations (maybe something should have been ran through payrol but wasn’t - a benefit or something). I think this could be another explanation. But I don’t know, I would have to know more.

I would ask your former employer for an explanation. I don’t think they necessarily owe you anything - it should all work out in the end. But they would be better to explain than anyone else.

]]> By: Teri http://www.pfadvice.com/2007/03/09/why-are-bonuses-so-heavily-taxed/#comment-81728 Teri Tue, 31 Jul 2007 21:18:02 +0000 http://www.pfadvice.com/2007/03/09/why-are-bonuses-so-heavily-taxed/#comment-81728 Richard, I am not sure why there would be confusion. There are very different withholding rules for all types of income but most of it is just ordinary income (outside of investments usually). There is no difference in the way a paycheck or a bonus is taxed when you file your tax return, but yes withholding rules are different. Much as they are very unique for retirement distributions which are also in the end taxed the same as other ordinary income. In California rental real estate has some insane withholding rules upon the sale. Etc., etc. Much of the time withholding rules have little to do with the actual taxes owed. Which brings me to Lou: I am not sure in this particular case. One reason is to ensure you have proper withholding, in case your bonus bumps you up to a higher tax bracket. However, in many cases, extra withholdig is required merely to increase cash flow to the government. Sure they will have to pay back all that over-withholding, but it makes their bottom line look good now. I think it is a little bit of both. The bonus withholding rates has varied with time, usually in line with overall tax rates though. My educated guess is a little of both reasons. Richard,

I am not sure why there would be confusion. There are very different withholding rules for all types of income but most of it is just ordinary income (outside of investments usually). There is no difference in the way a paycheck or a bonus is taxed when you file your tax return, but yes withholding rules are different. Much as they are very unique for retirement distributions which are also in the end taxed the same as other ordinary income. In California rental real estate has some insane withholding rules upon the sale. Etc., etc. Much of the time withholding rules have little to do with the actual taxes owed.

Which brings me to Lou:

I am not sure in this particular case. One reason is to ensure you have proper withholding, in case your bonus bumps you up to a higher tax bracket. However, in many cases, extra withholdig is required merely to increase cash flow to the government. Sure they will have to pay back all that over-withholding, but it makes their bottom line look good now. I think it is a little bit of both. The bonus withholding rates has varied with time, usually in line with overall tax rates though. My educated guess is a little of both reasons.

]]> By: kevin http://www.pfadvice.com/2007/03/09/why-are-bonuses-so-heavily-taxed/#comment-80900 kevin Mon, 30 Jul 2007 05:25:40 +0000 http://www.pfadvice.com/2007/03/09/why-are-bonuses-so-heavily-taxed/#comment-80900 Don't know the full details, but would guess that you didn't get the bonus because you left before it was distributed and taxes were taken out in anticipation of this. In this case, you wouldn't be entitled to the bonus, but would get back the taxes paid when you file your tax return. Don’t know the full details, but would guess that you didn’t get the bonus because you left before it was distributed and taxes were taken out in anticipation of this. In this case, you wouldn’t be entitled to the bonus, but would get back the taxes paid when you file your tax return.

]]> By: Will http://www.pfadvice.com/2007/03/09/why-are-bonuses-so-heavily-taxed/#comment-80895 Will Mon, 30 Jul 2007 05:01:56 +0000 http://www.pfadvice.com/2007/03/09/why-are-bonuses-so-heavily-taxed/#comment-80895 I just had a question if anyone knows. i recently quit a job but when comparing check stubs i noticed the bonus section had a huge difference that means they taxed me but kept the check am i entitled to this check ?? thanks to anyone who can help or direct me to the right answer I just had a question if anyone knows. i recently quit a job but when comparing check stubs i noticed the bonus section had a huge difference that means they taxed me but kept the check am i entitled to this check ?? thanks to anyone who can help or direct me to the right answer

]]> By: Lou http://www.pfadvice.com/2007/03/09/why-are-bonuses-so-heavily-taxed/#comment-37483 Lou Wed, 18 Apr 2007 15:20:59 +0000 http://www.pfadvice.com/2007/03/09/why-are-bonuses-so-heavily-taxed/#comment-37483 I understand the FEDS take 25% off the top. My question is, why does the goverment have a higher rate for bonuses than for regular payroll wages? At some point, some lawmaker(s) proposed this into tax law and it passed. But what was the lawmakers reasoning or justification for this law? I understand the FEDS take 25% off the top. My question is, why does the goverment have a higher rate for bonuses than for regular payroll wages? At some point, some lawmaker(s) proposed this into tax law and it passed. But what was the lawmakers reasoning or justification for this law?

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