Taxes on Bonus

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james4684
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Joined: Thu Oct 31, 2019 8:26 am

Taxes on Bonus

Post by james4684 »

I'll be receiving a "productivity bonus" at the end of the year that is calculated specifically based on how much revenue I've brought in. I've been trying to read up on how these are taxed and I've read two methods - the percentage method (seems like employers withhold 22%) and the aggregate method where taxes are withheld at my marginal rate.

It seems like these are mostly instructions for the employer however. So my question is does it matter for me at all which method they use or does the entire bonus end up getting counted as ordinary taxable income when all is said and done when I file my taxes for the year.

My marginal tax bracket will be either 32 or 35% this year so if there's a way to only pay 22% on this money that's obviously better!
bberris
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Re: Taxes on Bonus

Post by bberris »

Bonuses are ordinary income and subject to income and payroll taxes just like other wages. The percentages you quoted are just withholding rates. Withholding rates are higher on bonuses because salary is subject to the standard deduction and lower marginal rates. You settle the difference with your tax return.
runner540
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Re: Taxes on Bonus

Post by runner540 »

There's nothing you can do to change the tax owed. Bonuses are taxed at your marginal rate like any other income. Your employer has no idea what your marginal tax rate is. Employers are required by the IRS to withhold 22% on bonuses <$1MM, so you need to check the math and be prepared to pay up the difference when you file.
senex
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Re: Taxes on Bonus

Post by senex »

bberris wrote: Thu Oct 31, 2019 9:00 am Bonuses are ordinary income and subject to income and payroll taxes just like other wages. The percentages you quoted are just withholding rates. Withholding rates are higher on bonuses because salary is subject to the standard deduction and lower marginal rates. You settle the difference with your tax return.
Mostly agree -- though withholding on bonuses may be higher *or* lower than your marginal rate, depending on circumstance. Furthermore, if your company withholds at 22%, depending on the size of your bonus, you could be sufficiently "underwithheld" that you may owe penalties in addition to the incremental tax due with your return. So be careful about underwithholding.

The rule of thumb is to manage your withholding to ensure you qualify with the "safe harbor rules," which I think preclude penalties if you withhold 90%+ of this year's total tax or 110%+ of last year's total tax. If you withhold less than that, you will probably pay a penalty. Companies I've worked have allowed me to specify "extra" federal withholding of any amount I wished.
Glockenspiel
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Re: Taxes on Bonus

Post by Glockenspiel »

The biggest misconception that people have on taxes is that they think taxes on bonuses are way higher than taxes on salary or normal wages. It's withheld at a higher rate, but it's just taxes at your marginal rate, depending on your overall income.
MathIsMyWayr
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Re: Taxes on Bonus

Post by MathIsMyWayr »

senex wrote: Thu Oct 31, 2019 10:37 am
bberris wrote: Thu Oct 31, 2019 9:00 am Bonuses are ordinary income and subject to income and payroll taxes just like other wages. The percentages you quoted are just withholding rates. Withholding rates are higher on bonuses because salary is subject to the standard deduction and lower marginal rates. You settle the difference with your tax return.
Mostly agree -- though withholding on bonuses may be higher *or* lower than your marginal rate, depending on circumstance. Furthermore, if your company withholds at 22%, depending on the size of your bonus, you could be sufficiently "underwithheld" that you may owe penalties in addition to the incremental tax due with your return. So be careful about underwithholding.

The rule of thumb is to manage your withholding to ensure you qualify with the "safe harbor rules," which I think preclude penalties if you withhold 90%+ of this year's total tax or 110%+ of last year's total tax. If you withhold less than that, you will probably pay a penalty. Companies I've worked have allowed me to specify "extra" federal withholding of any amount I wished.
If your yearly withholding is not enough to avoid the under-withholding penalty even with the total number of allowances set to zero, you may withhold an additional amount by a specific dollar amount.
livesoft
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Re: Taxes on Bonus

Post by livesoft »

As noted, tax withholding on a bonus is not the same thing as income tax on a bonus. So it seems you will be paying 32% to 35% or more on this bonus money. If your employer only withholds 25% or less, then you may end up owing more tax when you file your tax return and may owe a penalty if your income for 2019 does not meet one of the no-penalty-owed safe harbor rules of the IRS.

One safe harbor rule that you might use is to have withheld at least 110% of your tax liability for 2018. This is easy to find on your 2018 tax return. You can adjust your December paycheck withholding to meet this safe harbor.
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index2max
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Re: Taxes on Bonus

Post by index2max »

I receive profit sharing bonuses each fiscal quarter.

They are withheld at a higher rate. I believe the IRS requires employers to withhold them at a rate of 40% for income taxes. Someone correct me if i am wrong on that amount.

Good thing is that one should normally get the money back when filling their federal tax return. Most of us aren’t making enough money to get taxed at the highest federal income tax bracket.
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FiveK
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Re: Taxes on Bonus

Post by FiveK »

index2max wrote: Thu Oct 31, 2019 12:58 pm I believe the IRS requires employers to withhold them at a rate of 40% for income taxes. Someone correct me if i am wrong on that amount.
There is nothing in Pub. 15 (Circular E) Employer's Tax Guide requiring that.

For most people it will be a flat 22%.

But if you are very high income: "If a supplemental wage payment, together with other sup-plemental wage payments made to the employee during the calendar year, exceeds $1 million, the excess is sub-ject to withholding at 37%...."
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Monster99
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Re: Taxes on Bonus

Post by Monster99 »

When I was working, our bonus for the previous year was paid in February and also subjected to social security withholding.... total withholding was about 45%😐
Texanbybirth
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Re: Taxes on Bonus

Post by Texanbybirth »

Not sure if your situation is similar, but there are instances (read: like mine) where the flat 22% is silly and you can fight the system. Here's the thread where poster FiveK helped me beat "the man". Again, it might not apply to you but it might be helpful.

viewtopic.php?f=2&t=239962
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Topic Author
james4684
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Re: Taxes on Bonus

Post by james4684 »

Thanks everyone. That’s what I figured. Didn’t make sense that it would end up being anything other than ordinary income just based off how an employer characterizes it.

I’ll be in the safe harbor for sure. Thanks!!
index2max
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Re: Taxes on Bonus

Post by index2max »

FiveK wrote: Thu Oct 31, 2019 2:26 pm
index2max wrote: Thu Oct 31, 2019 12:58 pm I believe the IRS requires employers to withhold them at a rate of 40% for income taxes. Someone correct me if i am wrong on that amount.
There is nothing in Pub. 15 (Circular E) Employer's Tax Guide requiring that.

For most people it will be a flat 22%.

But if you are very high income: "If a supplemental wage payment, together with other sup-plemental wage payments made to the employee during the calendar year, exceeds $1 million, the excess is sub-ject to withholding at 37%...."
Someone from HR at my company just spit out that number. Maybe they were combining the federal income withholding percent with that for FICA which probably adds up to 40% in total.
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FiveK
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Re: Taxes on Bonus

Post by FiveK »

index2max wrote: Fri Nov 01, 2019 3:41 pm
FiveK wrote: Thu Oct 31, 2019 2:26 pm
index2max wrote: Thu Oct 31, 2019 12:58 pm I believe the IRS requires employers to withhold them at a rate of 40% for income taxes. Someone correct me if i am wrong on that amount.
There is nothing in Pub. 15 (Circular E) Employer's Tax Guide requiring that.

For most people it will be a flat 22%.

But if you are very high income: "If a supplemental wage payment, together with other sup-plemental wage payments made to the employee during the calendar year, exceeds $1 million, the excess is sub-ject to withholding at 37%...."
Someone from HR at my company just spit out that number. Maybe they were combining the federal income withholding percent with that for FICA which probably adds up to 40% in total.
Could be. Also could be that the HR person didn't have a clue. E.g., see the viewtopic.php?f=2&t=239962 thread mentioned by Texanbybirth a few posts back. ;)
runner540
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Re: Taxes on Bonus

Post by runner540 »

index2max wrote: Fri Nov 01, 2019 3:41 pm
FiveK wrote: Thu Oct 31, 2019 2:26 pm
index2max wrote: Thu Oct 31, 2019 12:58 pm I believe the IRS requires employers to withhold them at a rate of 40% for income taxes. Someone correct me if i am wrong on that amount.
There is nothing in Pub. 15 (Circular E) Employer's Tax Guide requiring that.

For most people it will be a flat 22%.

But if you are very high income: "If a supplemental wage payment, together with other sup-plemental wage payments made to the employee during the calendar year, exceeds $1 million, the excess is sub-ject to withholding at 37%...."
Someone from HR at my company just spit out that number. Maybe they were combining the federal income withholding percent with that for FICA which probably adds up to 40% in total.
40% was the number for $1MM+ bonuses before tax year 2018.
RubyTuesday
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Re: Taxes on Bonus

Post by RubyTuesday »

You may want to look into whether your company sponsors a non qualified deferred compensation plan. High income (base salary and/or bonuses) can often be deferred into a NQDC plan and paid out in future potentially lower income years after growing tax deferred. Probably too late to elect to defer for this payment, there may be an enrollment period for 2020.
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index2max
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Re: Taxes on Bonus

Post by index2max »

FiveK wrote: Fri Nov 01, 2019 3:58 pm
index2max wrote: Fri Nov 01, 2019 3:41 pm
FiveK wrote: Thu Oct 31, 2019 2:26 pm
index2max wrote: Thu Oct 31, 2019 12:58 pm I believe the IRS requires employers to withhold them at a rate of 40% for income taxes. Someone correct me if i am wrong on that amount.
There is nothing in Pub. 15 (Circular E) Employer's Tax Guide requiring that.

For most people it will be a flat 22%.

But if you are very high income: "If a supplemental wage payment, together with other sup-plemental wage payments made to the employee during the calendar year, exceeds $1 million, the excess is sub-ject to withholding at 37%...."
Someone from HR at my company just spit out that number. Maybe they were combining the federal income withholding percent with that for FICA which probably adds up to 40% in total.
Could be. Also could be that the HR person didn't have a clue. E.g., see the viewtopic.php?f=2&t=239962 thread mentioned by Texanbybirth a few posts back. ;)
Yeah, this is why I do my own research on the rules of HSAs, 401(k)s etc, because I don't expect my company's HR staff to be on top of all the details. Their job is to attend meetings and give me the high-level overview of things. It's my second job to be my own accountant :wink:
Traveler
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Re: Taxes on Bonus

Post by Traveler »

My experience this year is that bonuses were withheld at 22% which is actually not enough
GeMoney
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Re: Taxes on Bonus

Post by GeMoney »

To see what the standard payroll tax rates are for Federal and your state go here: https://www.adp.com/resources/tools/tax ... guide.aspx

If you by chance wanted to deduct even more, fill out another payroll tax withholding form for Federal and/or State and add any additional amount you want to withhold. Depending on your accounting/payroll department, you can do this as often as you like but if make changes too often they're not going to like you very much :shock:
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neurosphere
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Re: Taxes on Bonus

Post by neurosphere »

Traveler wrote: Fri Nov 01, 2019 8:33 pm My experience this year is that bonuses were withheld at 22% which is actually not enough
I guess it depends on one's marginal tax rate, whether 22% is enough or too much.

btw, I thought employers had the choice to withhold 22% OR simply treat the bonus as any other payroll and follow the W4 withholding formulas? I realize that it's easier for most employers to use the 22% method. Also, if using standard withholding tables, I'd assume most bonuses would have too MUCH withheld. E.g. a person with a salary of $100,000 who gets paid twice a month, then gets an end of year bonus of $10,000...that $10,000 bonus would be treated as if annual salary was $240,000 and taxes withheld accordingly from that payment.
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neurosphere
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Re: Taxes on Bonus

Post by neurosphere »

OMG, stumbled across this link from turbo tax
turbo tax very incorrectly wrote:While bonuses are subject to income taxes, they don't simply get added to your income and taxed at your top marginal tax rate. Instead, your bonus counts as supplemental income and is subject to federal withholding at a 22% flat rate.
Seriously turbo tax? The text at that link goes back and forth referring to the withholding as the "tax" vs "withholding". Yikes. How many people is that going to confuse!?

Oh year, and there is this:
And if you expect to take a pay cut in the next year—for example, if you're ready to retire—ask your employer to defer your bonus until the following tax year to lower your overall tax liability.
:oops:

Is it any wonder why so many people remain confused about the taxation of bonuses? :annoyed
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes".
tman389
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Re: Taxes on Bonus

Post by tman389 »

Employers do have the option of withholding at a flat 22% or combining the bonus with any other wage payments made that week (like regular salary check) and withholding based on W-4. But as Neurosphere noted, that would result in higher withholdings because the bonus would be annualized, moving the taxpayer into a much higher tax bracket. Further, most corporate payroll systems are set up only to withhold at 22%.
CT-Scott
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Re: Taxes on Bonus

Post by CT-Scott »

I believe this changed as part of the Trump tax changes. Last year our bonuses had tax withheld at that lower 22% rate, whereas in years prior our bonuses were withheld at a much higher rate. Our tax bracket was between the two, so last year the amount of tax withheld was not enough, whereas in years prior too much tax was being withheld.
Thegame14
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Re: Taxes on Bonus

Post by Thegame14 »

it doesn't matter how much they withhold. If they take out "too much" then you will get a bigger tax refund, if they take out "too little" you will owe more taxes on your tax return.
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FiveK
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Re: Taxes on Bonus

Post by FiveK »

CT-Scott wrote: Tue Nov 05, 2019 1:55 pm I believe this changed as part of the Trump tax changes. Last year our bonuses had tax withheld at that lower 22% rate, whereas in years prior our bonuses were withheld at a much higher rate. Our tax bracket was between the two, so last year the amount of tax withheld was not enough, whereas in years prior too much tax was being withheld.
If one defines 25% as a much higher rate than 22%, then yes. See p. 19 of https://www.irs.gov/pub/irs-prior/p15--2017.pdf for the 25% number. See also Thegame14's comment.
EddyB
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Re: Taxes on Bonus

Post by EddyB »

GeMoney wrote: Sat Nov 02, 2019 10:07 am To see what the standard payroll tax rates are for Federal and your state go here: https://www.adp.com/resources/tools/tax ... guide.aspx

If you by chance wanted to deduct even more, fill out another payroll tax withholding form for Federal and/or State and add any additional amount you want to withhold. Depending on your accounting/payroll department, you can do this as often as you like but if make changes too often they're not going to like you very much :shock:
Except that submitting a new W-4 doesn't alter the rate at which supplemental wages will be withheld, and that's the subject of this thread. For employees who don't know (well) in advance how much their bonuses will be, they wouldn't know what to target for withholding on other income to make up for over- or under-withholding on bonus income (if they even wanted to).
CT-Scott
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Re: Taxes on Bonus

Post by CT-Scott »

So I just went back and double-checked the bonus I got this year and the year before (under Trump tax changes) and I was off on what I said before. I could have sworn that I had noted a big difference where I had a lot *less* tax withheld from my bonuses, but I actually had about 33% withheld. Now, going back to the year before that (pre-Trump tax changes), it looks like I had about 37% withheld, so there was a not-insignificant decrease, but I was still having an awful lot withheld.
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neurosphere
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Re: Taxes on Bonus

Post by neurosphere »

CT-Scott wrote: Tue Nov 05, 2019 7:02 pm So I just went back and double-checked the bonus I got this year and the year before (under Trump tax changes) and I was off on what I said before. I could have sworn that I had noted a big difference where I had a lot *less* tax withheld from my bonuses, but I actually had about 33% withheld. Now, going back to the year before that (pre-Trump tax changes), it looks like I had about 37% withheld, so there was a not-insignificant decrease, but I was still having an awful lot withheld.
What portion of taxes withheld were FEDERAL income taxes, vs STATE income taxes, vs SS taxes, and Medicare taxes?

Off the top of my head, I don't think there were changes to state, SS, and medicare withholding. Although note that if one had already had earnings above the social security maximum aka sswb or the benefit and contribution base, then the SS component would have applied to you but could have applied to others.
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