Monthly bonus - taxed at 25%

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
DCA2021
Posts: 5
Joined: Sat May 08, 2021 2:28 pm

Monthly bonus - taxed at 25%

Post by DCA2021 »

Hi- part of my pay is classified as a “bonus” and taxed at the flat 25% rate. As a result, my cash flow is low and I have to wait until tax time to settle up with the government. Any ideas how I can increase my current cash flow?
Triple digit golfer
Posts: 7696
Joined: Mon May 18, 2009 5:57 pm

Re: Monthly bonus - taxed at 25%

Post by Triple digit golfer »

Reduce your withholding for the rest of the year so that come tax time, you aren't owed a large refund.
User avatar
RickBoglehead
Posts: 6643
Joined: Wed Feb 14, 2018 9:10 am
Location: In a house

Re: Monthly bonus - taxed at 25%

Post by RickBoglehead »

Triple digit golfer wrote: Sun May 09, 2021 7:40 am Reduce your withholding for the rest of the year so that come tax time, you aren't owed a large refund.
Right. Compute how much tax is required for safe harbor,and don't have another dime withheld from your regular pay.

IRS bonus % is 22, not 25. Is the extra 3% state?
Avid user of forums on variety of interests-financial, home brewing, F-150, PHEV, home repair, etc. Enjoy learning & passing on knowledge. It's PRINCIPAL, not PRINCIPLE. I ADVISE you to seek ADVICE.
User avatar
Nate79
Posts: 7146
Joined: Thu Aug 11, 2016 6:24 pm
Location: Delaware

Re: Monthly bonus - taxed at 25%

Post by Nate79 »

Do not confuse withholding with tax. They are not the same thing.
User avatar
TomatoTomahto
Posts: 12577
Joined: Mon Apr 11, 2011 1:48 pm

Re: Monthly bonus - taxed at 25%

Post by TomatoTomahto »

RickBoglehead wrote: Sun May 09, 2021 7:43 am
Triple digit golfer wrote: Sun May 09, 2021 7:40 am Reduce your withholding for the rest of the year so that come tax time, you aren't owed a large refund.
Right. Compute how much tax is required for safe harbor,and don't have another dime withheld from your regular pay.

IRS bonus % is 22, not 25. Is the extra 3% state?
OP, welcome to the forum.

It’s part of dealing with what I call “lumpy salary” to calculate how much extra or less you should have withheld from “regular” checks. My wife gets a large part of her comp as a bonus, so we have estimated taxes to pay. Your effective tax rate is apparently less than 22% so you have to adjust your regular withholding.

It will all work itself out at year end, but I would say that if the “cash flow” is insufficient, you might want to look at your spending. I say that absent necessary information, but perhaps I’m right (a stopped clock is right twice a day).
I get the FI part but not the RE part of FIRE.
User avatar
grabiner
Advisory Board
Posts: 29868
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Monthly bonus - taxed at 25%

Post by grabiner »

Welcome to the forum!

The purpose of withholding is to ensure that the correct amount of tax is paid. If you have a very simple situation (one income, no tax credits, nothing taxed or withheld at an unusual rate), and you fill out the form W-4 according to its basic instructions, the withholding will exactly equal your tax. But when you add any complication, the withholding may come out wrong, and you should fill out a W-4 which requests the correct withholding.

The IRS has a calculator which would help with this. In your situation (overwithholding on bonuses), you may need to tell the IRS calculator that you have had extra tax withheld which hasn't actually been withheld yet. If you expect to have $10K in bonuses in the rest of the year that are withheld at 22% rather than 12%, you will have $1000 in withholding beyond what should happen with your salary.

Check your tax return to see whether this is the actual reason for the refund. If you take the earned income tax credit, that also leads to a refund, and you can adjust your W-4 accordingly to get that benefit with every paycheck instead of waiting until next April.
Wiki David Grabiner
User avatar
JoMoney
Posts: 11514
Joined: Tue Jul 23, 2013 5:31 am

Re: Monthly bonus - taxed at 25%

Post by JoMoney »

You haven't shared enough information for anyone to know if your tax withholding is correct, or if you there is reason to believe you'll get something back (or maybe owe) come tax time when you "settle up with the government."

If you need more cash, it sounds like you need more work, or need to sell something.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
AnEngineer
Posts: 555
Joined: Sat Jun 27, 2020 4:05 pm

Re: Monthly bonus - taxed at 25%

Post by AnEngineer »

Nate79 wrote: Sun May 09, 2021 8:55 am Do not confuse withholding with tax. They are not the same thing.
To make this more explicit for the OP: your bonus is NOT taxed at a flat 25%. Rather, taxes are withheld at that rate. At the end of the year when you file, bonuses are treated the same as the rest of your wage income.
User avatar
TomatoTomahto
Posts: 12577
Joined: Mon Apr 11, 2011 1:48 pm

Re: Monthly bonus - taxed at 25%

Post by TomatoTomahto »

AnEngineer wrote: Sun May 09, 2021 11:28 am
Nate79 wrote: Sun May 09, 2021 8:55 am Do not confuse withholding with tax. They are not the same thing.
To make this more explicit for the OP: your bonus is NOT taxed at a flat 25%. Rather, taxes are withheld at that rate. At the end of the year when you file, bonuses are treated the same as the rest of your wage income.
I’m glad you brought that up. We too often assume that people differentiate between withholding and taxation, and you know what they say about “assume.”
I get the FI part but not the RE part of FIRE.
ryman554
Posts: 1369
Joined: Sun Jan 12, 2014 9:44 pm

Re: Monthly bonus - taxed at 25%

Post by ryman554 »

AnEngineer wrote: Sun May 09, 2021 11:28 am
Nate79 wrote: Sun May 09, 2021 8:55 am Do not confuse withholding with tax. They are not the same thing.
To make this more explicit for the OP: your bonus is NOT taxed at a flat 25%. Rather, taxes are withheld at that rate. At the end of the year when you file, bonuses are treated the same as the rest of your wage income.
And the rationale for this (22% nee 25%) is because a bonus is "on top of" your normal income, so it will be at a marginal rate. If you look at withholding, the IRS tries to do a good job estimating the actual tax based on your yearly income, and accounts for moving through the various tax brackets. Someone at the IRS figured that "most folks" that get a bonus end up in the 22% bracket after all is said and done, so withholding bonus/extra income is at that rate is "good enough". And most of the rest are lower, so you over-withhold. IRS (and most taxpayers) prefer that instead of under-withholding, so, well, there we are then.

Practical application of the 80/20 rule.
sailaway
Posts: 3253
Joined: Fri May 12, 2017 1:11 pm

Re: Monthly bonus - taxed at 25%

Post by sailaway »

TomatoTomahto wrote: Sun May 09, 2021 11:32 am
AnEngineer wrote: Sun May 09, 2021 11:28 am
Nate79 wrote: Sun May 09, 2021 8:55 am Do not confuse withholding with tax. They are not the same thing.
To make this more explicit for the OP: your bonus is NOT taxed at a flat 25%. Rather, taxes are withheld at that rate. At the end of the year when you file, bonuses are treated the same as the rest of your wage income.
I’m glad you brought that up. We too often assume that people differentiate between withholding and taxation, and you know what they say about “assume.”
While OP might not have used the right words, they do seem to seem to have a grasp on the concept, since they mentioned "settling up with the government."

OP, you adjust you overall withholdings with the W4, available through HR. If your company uses a payroll service, you may be able to do this online.
Post Reply