Taxing bonuses

[quesyrah]

DH was approached by his employer to consider changing roles. While it is a lateral move it comes with additional pay because it's a crappy schedule.

If he gets his regular base pay plus a 20% annual bonus in the new role, how is that bonus taxed?

[daisyn]

bonus is taxed the same way any salary type of income is taxed.

[sunnysally]

The bonuses I get are taxed at 45%.

[audry80]

Dec 8, 2015 21:57:30 GMT -5 daisyn said:

bonus is taxed the same way any salary type of income is taxed.

Not for me. Mine is taxed at around 45%. 

[y4m]

Bonuses aren't taxed any differently than any other income--they are sometimes subject to higher withholding at the time of the check, but any over or under withholding washes out when you file taxes.

[Deleted]

Dec 8, 2015 21:57:30 GMT -5 daisyn said:

bonus is taxed the same way any salary type of income is taxed.

Same for me too.

[shamrockshake]

Dec 8, 2015 22:20:08 GMT -5 y4m said:

Bonuses aren't taxed any differently than any other income--they are sometimes subject to higher withholding at the time of the check, but any over or under withholding washes out when you file taxes.

Exactly, and the withholding rate will vary by employer, ours are 25%

[quesyrah]

Dec 8, 2015 22:20:08 GMT -5 y4m said:

Bonuses aren't taxed any differently than any other income--they are sometimes subject to higher withholding at the time of the check, but any over or under withholding washes out when you file taxes.

Bear with me...can you dumb that down for me because I'm not sure I totally understand what you're saying

[tealblue]

Dec 8, 2015 22:29:18 GMT -5 quesyrah said:

Dec 8, 2015 22:20:08 GMT -5 y4m said:

Bonuses aren't taxed any differently than any other income--they are sometimes subject to higher withholding at the time of the check, but any over or under withholding washes out when you file taxes.

Bear with me...can you dumb that down for me because I'm not sure I totally understand what you're saying

Bonus dollars earned are taxed the exact same way as regular wages are- they go on your W2. However, each company can withhold at different rates. It sounds like some people (above) get their bonus taxes withheld at the highest federal rate 35% + state + local taxes (to get somewhere around 45%). Each is going to be different based on state/local taxes. When you file your next years tax return, your effective tax rate may only be 25% + state and local. So that 10% extra (35%-25%) will be refunded back to you as a normal IRS refund.

There is no different tax category for bonuses- it's just regular ordinary income. Your company's payroll department doesn't know your what your tax rate will be so they likely will withhold at a high rate to cover all of your tax liability on that particular bonus check.

[daisyn]

Dec 8, 2015 22:05:46 GMT -5 sunnysally said:

The bonuses I get are taxed at 45%.

Not if you live in the US.  There is no such thing as a 45% individual tax rate on income.
They may withhold 45% but that's not the tax rate.

[hazelden]

Sounds like he's getting a 20% raise. You'll ultimately pay the same amount of taxes, but the big bonus check may have more taken out to begin with. It all works out in the end when you file taxes.

[quesyrah]

Dec 8, 2015 22:39:34 GMT -5 tealblue said:

Dec 8, 2015 22:29:18 GMT -5 quesyrah said:

Bear with me...can you dumb that down for me because I'm not sure I totally understand what you're saying

Bonus dollars earned are taxed the exact same way as regular wages are- they go on your W2. However, each company can withhold at different rates. It sounds like some people (above) get their bonus taxes withheld at the highest federal rate 35% + state + local taxes (to get somewhere around 45%). Each is going to be different based on state/local taxes. When you file your next years tax return, your effective tax rate may only be 25% + state and local. So that 10% extra (35%-25%) will be refunded back to you as a normal IRS refund.

There is no different tax category for bonuses- it's just regular ordinary income. Your company's payroll department doesn't know your what your tax rate will be so they likely will withhold at a high rate to cover all of your tax liability on that particular bonus check.

That makes sense, thank you.

[quesyrah]

Dec 8, 2015 23:01:07 GMT -5 hazelden said:

Sounds like he's getting a 20% raise. You'll ultimately pay the same amount of taxes, but the big bonus check may have more taken out to begin with. It all works out in the end when you file taxes.

Thanks

[sfy]

What may get you closer to what you want to know is knowing what percentage of bonuses people are netting? I track them, I don't have my crazy person notepad near me now to say for sure, but I think usually it's between 48-55%. I'll update later if that's off.

[Deleted]

When employers issue a bonus they are required by the IRS to withhold 25% for federal taxes. This is called the "supplemental rate" and it's not optional for employers to choose whether or not they want to withhold it. So by the time they take out the 25% supplemental rate + FICA, medicare, and any other applicable state, county, and city rates.....I tell people it's safe to bet on getting around 50% of that bonus up front.

But it all washes out at the end of year, as everyone has noted.

[quesyrah]

Thank you sfy and papiercherri

[genet313]

Dec 8, 2015 22:20:08 GMT -5 y4m said:

Bonuses aren't taxed any differently than any other income--they are sometimes subject to higher withholding at the time of the check, but any over or under withholding washes out when you file taxes.

But for some companies you can elect to tax bonus at a higher/lower rate.  DH just did this, so we could have more withheld and not get hit with a bigger than anticipated bill at tax time (like last year, which really hurt us while I was on ML).  

[imojoebunny]

Places we have worked treat the bonus, as if you made that much every paycheck, so it is taxed at a higher rate. If your employer allows it, you can changing your withholding before the paycheck with the bonus, you can lessen the impact of this treatment, just don't forget to change it back. Of course, in the end, it is all a wash.

[niq]

I just want to thank all the MM pedants who carefully distinguished between "tax rates" and "withholding rates". You are my people.

Next up: an in-depth clarification of how marginal tax rates work. Excitement!

[niq]

It's also a good idea to re-run your through the IRS withholding calculator the pay period after the bonus. At that point, the "year to date" pay stubs should accurately reflect the bonus's withholding treatment.

[megstoo]

For us it depends. If it's put though as "BONUS" it's taxed at a higher withholding rate. If it's put through as salary it's our regular withholding percentage.

[y4m]

A relevant article (and calculator) from today:

twocents.lifehacker.com/this-tool-calculates-how-much-your-bonus-will-be-taxed-1747198244

[tres3]

Dec 8, 2015 22:40:44 GMT -5 daisyn said:

Dec 8, 2015 22:05:46 GMT -5 sunnysally said:

The bonuses I get are taxed at 45%.

Not if you live in the US.  There is no such thing as a 45% individual tax rate on income.
They may withhold 45% but that's not the tax rate.

There is if you add state income taxes to the fed taxes (income, FICA)