Tax cuts from bonus vs base salary

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ThisJustIn
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Tax cuts from bonus vs base salary

Post by ThisJustIn »

Are the tax deductions from bonus pay and regular salary the same? As far as i recall, bonus tax cut is higher, which is why people increase their 401K pre-tax contribution before bonus payout.
TurnAround
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Re: Tax cuts from bonus vs base salary

Post by TurnAround »

I’ve always found the tax withholding for bonuses to be a bit higher because they treat it as if that single payment is your paycheck for the entire year. My bonuses get lumped into a standard paycheck which gives me a much higher payment that period.

I have not heard of increasing the 401k withholding for just that period. I calculate my 401k withholding taking into account salary and an estimate on bonus.
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FiveK
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Re: Tax cuts from bonus vs base salary

Post by FiveK »

Federal tax withholding from a bonus will usually be 22%.

The actual tax you owe for the year, and the amount of withholding you have paid for the year, get reconciled when you file next year.

See Form 1040 (https://www.irs.gov/pub/irs-pdf/f1040.pdf). There is no distinction on line 1 between regular and bonus pay.

Then see line 17 where you get credit for all the withholding.

Understanding all the other lines is good also - see yours from 2019 if you aren't familiar with how it works.
wootwoot
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Re: Tax cuts from bonus vs base salary

Post by wootwoot »

TurnAround wrote: Wed Sep 02, 2020 9:31 pm I’ve always found the tax withholding for bonuses to be a bit higher because they treat it as if that single payment is your paycheck for the entire year. My bonuses get lumped into a standard paycheck which gives me a much higher payment that period.
+1
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capitalG
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Re: Tax cuts from bonus vs base salary

Post by capitalG »

ThisJustIn wrote: Wed Sep 02, 2020 9:25 pm Are the tax deductions from bonus pay and regular salary the same? As far as i recall, bonus tax cut is higher, which is why people increase their 401K pre-tax contribution before bonus payout.
Some people I know do the same for one of two reasons: (1) To max out their 401k for the year as quickly as possible to get a few more months of tax deferred growth or (2) to increase their [non-retirement] cash flow for the rest of the year. Personally I like DCA over lump sum so I don’t mess with the bonus contribution %

capG
Jack FFR1846
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Re: Tax cuts from bonus vs base salary

Post by Jack FFR1846 »

Be careful with maxing out 401k contributions early in the year. I know that in my company's plan, matching is done each pay period. If I were to max out the 401k, say half way through the year, I'd get zero matching for the second half of the year as it's based on my making at least 4% contribution each pay period. So in this example, I'm giving away half the matching being offered.
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knowledge
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Re: Tax cuts from bonus vs base salary

Post by knowledge »

So long as your bonus is less than $1m, your federal withholding rate should be a flat 22% for the entire taxable amount of the bonus. Whether or not that's higher than your regular pay depends on what your base pay is and what your normal withholding is.

I have heard of the point that paycheck system withholds you higher because it annualizes that one payment, but I would imagine that in this day and age, any paycheck software would be able to accurately account for one-off bonus withholding.
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FiveK
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Re: Tax cuts from bonus vs base salary

Post by FiveK »

knowledge wrote: Thu Sep 03, 2020 8:23 am I have heard of the point that paycheck system withholds you higher because it annualizes that one payment, but I would imagine that in this day and age, any paycheck software would be able to accurately account for one-off bonus withholding.
In some cases the employer has a choice of how to implement withholding on supplemental wages (e.g., a bonus). See section 7 starting on p. 19 of https://www.irs.gov/pub/irs-pdf/p15.pdf.
sailaway
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Re: Tax cuts from bonus vs base salary

Post by sailaway »

knowledge wrote: Thu Sep 03, 2020 8:23 am So long as your bonus is less than $1m, your federal withholding rate should be a flat 22% for the entire taxable amount of the bonus. Whether or not that's higher than your regular pay depends on what your base pay is and what your normal withholding is.

I have heard of the point that paycheck system withholds you higher because it annualizes that one payment, but I would imagine that in this day and age, any paycheck software would be able to accurately account for one-off bonus withholding.
There are rules in place, it isn't just a matter of deciding and coding. Look at the current tax holiday. It applies if your biweekly pay is less than $4k because that is in line with current determinations of withholding. That your employer may choose whether or not to participate is the bizarre bit.

As I understand it, whether your bonus is withheld at 22% or at the % appropriate to your W-4 applied to the current gross depends on whether it is paid separately as a bonus or added to your regular paycheck. I do not know whether or not emoloyers ever make that choice with withholdings in mind or for their own accounting purposes. I know we would be under withheld if it were only 22%, rather than the higher amount. Heck, as it is we owe a bit every year, with a 22% withholding we might not meet safe harbor in a year with a good bonus.
carmonkie
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Re: Tax cuts from bonus vs base salary

Post by carmonkie »

Our bonus it withheld at 22% and paid together on the corresponding date all mixed together with regular pay. Megacorp matches 401(k) based on the total pre-tax regular wages + bonus, so that is nice. We just get a single and simple W-2.

I set my 401(k) deductions at a starting % in January and as the yearly and quarterly bonus are paid, I start gliding down the 401(k) withholding so that by the last pay-period I am right at the yearly max and the paychecks increase a bit through the year, so those are my raises.. :D
ShowMeTheER
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Re: Tax cuts from bonus vs base salary

Post by ShowMeTheER »

ThisJustIn wrote: Wed Sep 02, 2020 9:25 pm Are the tax deductions from bonus pay and regular salary the same? As far as i recall, bonus tax cut is higher, which is why people increase their 401K pre-tax contribution before bonus payout.
Depends on how much you make... but yes for most the bonus supp w/h will end up a larger %
Hyperchicken
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Re: Tax cuts from bonus vs base salary

Post by Hyperchicken »

Some people are sometimes mixing up tax withholding with the actual taxation, i.e. tax liability.

As others explained, taxes are withheld at a flat 22% rate from bonus, which for many people is indeed higher than their withholding from regular paycheck. However, bonus is still taxed as ordinary income, same as regular paycheck.

Total tax liability on $50k salary + $20k bonus is the same as on $70k salary and no bonus - but withholding may be different, to be then reconciled as tax due or tax refund.
DoubleComma
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Re: Tax cuts from bonus vs base salary

Post by DoubleComma »

Jack FFR1846 wrote: Thu Sep 03, 2020 8:23 am Be careful with maxing out 401k contributions early in the year. I know that in my company's plan, matching is done each pay period. If I were to max out the 401k, say half way through the year, I'd get zero matching for the second half of the year as it's based on my making at least 4% contribution each pay period. So in this example, I'm giving away half the matching being offered.
Depending on the company could be accurate, however mine does a matching funds true up in January the follow year that does not count toward that years match. Our Comp plans are all leveraged on performance, not MBO, so our acceleration kicks in late In the year. Our biggest bonuses are typically earned in Q4 and paid in Q1 so for several years in a row I’ve maxed my 401k by April or May.
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mmmodem
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Re: Tax cuts from bonus vs base salary

Post by mmmodem »

ThisJustIn wrote: Wed Sep 02, 2020 9:25 pm Are the tax deductions from bonus pay and regular salary the same? As far as i recall, bonus tax cut is higher, which is why people increase their 401K pre-tax contribution before bonus payout.
As others already replied, taxes are reconciled when you do your tax return so the tax you pay on a bonus is treated the same as your regular paycheck.

I do increase my 401k contribution for my bonus but it's not due to an increase in taxes. It's because tax withholdings from my normal paycheck is less than the flat 22% on bonuses. Increasing my 401k contribution on a paycheck is a way to decrease my tax refund come April. I could also adjust my withholding and accomplish the same thing but since the bonus is irregular, I prefer to have larger regular paychecks and a smaller bonus.
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ThisJustIn
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Re: Tax cuts from bonus vs base salary

Post by ThisJustIn »

Thank you all for your answers. In summary, you are saying that the final tax cut from bonus and paycheck is the same. And witholding amount from bonus is 22%, and adjustment is made during tax returns.

I'm in 35% tax bracket, I do increase my paycheck tax witholding using W-4 form.

I guess in my case and tax bracket, it doesn't make much difference if I increase 401K contribution during bonus payout. (By the way, I max out my 401K).

When it comes to 401K, I also prefer DCA rather than front-loading, and if final tax cut of bonus and paycheck is the same in the end, then there is no point changing 401K contributions during bonus payout. DCA throughout the year it is.
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