Profit Sharing/Bonuses question

[DisMN]

DH has never been in the position of getting regular bonuses at work. This year he's recieved them like clockwork but I'm at a loss as to the end result, so to speak. LOL

The amount taken out for taxes is a bit shocking but I'm hoping that's the extent the deductions for the bonuses. DH seems to think we'll be paying MORE tax on the bonuses in April.
Does anyone know more info on this?

Thanks!

 

[GAGirlInVA]

Bonuses are taxed at a higher rate (40%?) but it actually helps our tax return....

We try to keep our tax withholding even with what our tax liability is but bonuses throw it off in our favor.

 

[DisMN]

Bonuses are taxed at a higher rate (40%?) but it actually helps our tax return....

We try to keep our tax withholding even with what our tax liability is but bonuses throw it off in our favor.

We tend to do the same with our withholding. Nice to know that the bonus won't hurt (it wont get taxed a second time LOL) and might even help a tad!

Thanks for your input!

 

[RitaE]

In terms of bonuses - it is salary/wage income just like your paychecks. Remember that check withholding rates are not the same as tax rates. They are an estimation of what your tax bill might look given what you have told them is your household situation (married, how many dependents etc).

Where you are going to end up in April is the same as always .... How much money in total did you take in over the entire year, what kind of deductions, exemptions, and credits do you qualify for, and did you have enough cumulative taxes withheld or mailed in to meet the tax obligation.

 

[crisi]

Generally because bonus checks are large - the withholding on them is at the highest possible rate.

When you do your taxes, you'll be taxed at your tax rate. Unless that is high, the "extra" taxes you paid on bonuses should help.

Our bonus check also have extra 401k and ESPP deductions taken out - and since those are maxed without bonuses, it means that at year end our paychecks suddenly get bigger.

 

[Kies99]

He may be referring to the expiring Bush-era tax rates.

Currently the rates are 10, 15, 25, 28, 33 and 35%. These are set to expire at the end of this year. Starting in 2011 they will change to 15, 15, 28, 31, 36 and 39.6% (note the 15% would stay the same, all the rest would go up). That's if no action is taken on extending them or if Obama's plan is not approved.

I've also always been under the impression that a bonus was taxed at the highest rate so you'd look at it going from 35% to 39.6%.

 

[SaraJayne]

DH has never been in the position of getting regular bonuses at work. This year he's recieved them like clockwork but I'm at a loss as to the end result, so to speak. LOL

The amount taken out for taxes is a bit shocking but I'm hoping that's the extent the deductions for the bonuses. DH seems to think we'll be paying MORE tax on the bonuses in April.
Does anyone know more info on this?

Thanks!

It depends on whether the bonus moves you up a bracket or not.

Bonuses are considered income for tax purposes...so your income this year will be higher than last years.

And just to commiserate with you, it makes me cringe to see DH's bonus almost cut in half by taxes! His bonuses are pretty healthy even after taxes, but they'd be even better without!

 

[kiddo76]

It depends on whether the bonus moves you up a bracket or not.

Even if you move into the next bracket, you don't pay the higher tax rate on ALL of your income, only the amount that falls into the higher tax bracket.

 

[ColoradoDisneyFreaks]

It depends on whether the bonus moves you up a bracket or not.

Bonuses are considered income for tax purposes...so your income this year will be higher than last years.

And just to commiserate with you, it makes me cringe to see DH's bonus almost cut in half by taxes! His bonuses are pretty healthy even after taxes, but they'd be even better without!

Something to bear in mind, bonuses aren't a magical sort of income that "has" to get taxed at a higher rate either, and, you can change your withholding whenever you want so if your bonus comes at a known time, then change your withholding amounts to 15 dependents (or whatever the top limit is, it might be 9 I think) and then the amount withheld with be almost nothing. You pay taxes based on what your total income for the year is, when more or less taxes are taken out of one check, it's done because the algorithm extrapolates what your income for the year would be if that were your pay rate every period so you end up getting taxed at a higher rate than what you would if it were a normal paycheck. As long as your total amount deducted for the year is more than what your tax bill would be then you don't pay taxes.

You aren't required to withhold any taxes at all, you could pay them all on April 15th if that's what you wanted to do, you'd just need to have that money available to spend! For most people, it's easier to withhold from each paycheck because it seems like you don't even miss it, and you can't get out of SS and Medicare withholdings no matter what.

 

[msmayor]

Something to bear in mind, bonuses aren't a magical sort of income that "has" to get taxed at a higher rate either, and, you can change your withholding whenever you want so if your bonus comes at a known time, then change your withholding amounts to 15 dependents (or whatever the top limit is, it might be 9 I think) and then the amount withheld with be almost nothing. You pay taxes based on what your total income for the year is, when more or less taxes are taken out of one check, it's done because the algorithm extrapolates what your income for the year would be if that were your pay rate every period so you end up getting taxed at a higher rate than what you would if it were a normal paycheck. As long as your total amount deducted for the year is more than what your tax bill would be then you don't pay taxes.

You aren't required to withhold any taxes at all, you could pay them all on April 15th if that's what you wanted to do, you'd just need to have that money available to spend! For most people, it's easier to withhold from each paycheck because it seems like you don't even miss it, and you can't get out of SS and Medicare withholdings no matter what.

I do not believe this is true.

Bonuses are treated as one-time or "extra" paychecks and as such tax withholdings are NOT treated the same as a regular paycheck.

These types of checks have a flat % withheld; in my husband's case his flat percentage is 25%.

They cannot use the regular tax tables for bonus payments because it would assume that is one paycheck in a series of 52/26/12 and project that income over a full year.

One way or another, you NEED to have taxes withheld from that bonus or you could find yourself under-withheld at the end of the year and subject to penalty.

Its better to adjust your regular withholdings on your regular paychecks to account for the extra taken out of a bonus. That's what we do.

 

[clutter]

Most payroll systems are set up to withhold taxes on bonuses at specific, recipient-designated rates. (There is usally a default rate of 20 or 25%, but you can ask to have it changed.) Depending on your state, there is usually a standard rate for that as well. Then you have FICA withheld, too. That is the withholding portion.

As for taxes,taxes withheld from your normal salary use your gross income per period, the number of exemptions you declare, and withhold enough so that you would ideally break even at the end of the year. Bonus dollars do not figure into that. Our tax system is progressive. So the more money you make, the higher tax bracket you end up in. So, if at the end of the year you make taxable income of $xx,xxx, your total tax burden may only be 13% of your taxable income (for instance, if your tax liability is $13,000 on $100,000 of taxable income) but that rate is calculated by applying different percentages to the different brackets of income. Where you end up is the rate that any additional dollars will be paying taxes on. If you end up in the 28% tax bracket and you get a $1,000 bonus, you will owe an additional $280 in federal taxes (which will change your average tax rate to 13,280/101,000, or 13.15%). SO what you want is to have that $280 withheld.

So, look at the actual bonus check and see what percentage was withheld for federal income taxes. Look at your tax return and see what tax rate your taxable income ends up in. (There's a rate schedule, you might have to go to IRS.gov to find it. It will say something like if your taxable income is greater than this, you will pay $xx plus 28% for income over $xx,xxx.) This does NOT mean that your tax liability is 28% of your income!!!! It just means that at this point, every additional dollar you earn is taxed at this rate. Once you know your tax rate, you should be able to request that you have that percentage withheld from your bonus checks. Of course, there are dozens of other ways to play with your withholding to get it right, but this is probably the easiest.

Remember, the total taxes you pay is determined only by your tax return at the end of the year. What is withheld from your paycheck is just an estimate and can be adjusted to what works best for you.

 

[kiddo76]

An employer has several options on how it can withhold for bonuses. They can withhold using the tax tables or a flat 25% (no other % is allowed). FICA, etc, is also withheld.

 

[mrodgers]

Why is it so difficult to see how it is with taxes withheld?

I don't get more withheld from bonuses. It's because my quarterly bonus is much smaller than my paycheck. It wouldn't appear to be in a higher tax bracket.

It's not just with bonuses either. Regular paychecks would do this "more withheld" if it was larger for some reason. If I worked 48 hours of overtime, I would be put into the next bracket for that pay period and would take home $100 less than if I had worked 40 hours of overtime. My old 12 hour schedule gave me a week off straight once a month (8 days actually,) and I would work a lot of extra overtime during that week. It wasn't unusual to have near 100 hours of overtime by some people. Others wouldn't touch overtime opportunities over 40 hours because they thought they were getting screwed on taxes. It all comes out the same when tax return time comes.

People can't understand the withholding and I can't figure out why. I am repeatedly told at work by coworkers how I'm getting screwed on my tax return because they all get $8-10,000 back on taxes vs. my measly $2000. They can't understand that the difference of $6-8000 in our returns is a difference of me taking home $200-300+ more than they do every paycheck. They think they are doing great with such a large return while I could put that extra $300 simply in my savings and make a few more $$$.

 

[RitaE]

I've also always been under the impression that a bonus was taxed at the highest rate so you'd look at it going from 35% to 39.6%.

Again - remember, tax rates and withholding rates are two completely different things.

Your employer may have a procedure in place to withhold taxes from a bonus check at a specific rate. You may or may not be able to get them to adjust that.

That is NOT the same thing as the TAX rate.

Bonuses are simply ordinary wage income and the standard tax tables that all your other paychecks are subject to applies to bonuses.

 

[leight]

An employer has several options on how it can withhold for bonuses. They can withhold using the tax tables or a flat 25% (no other % is allowed). FICA, etc, is also withheld.

This- my annual has a flat fee that my company tells me they are required to withhold and 25% sounds about right