Bonus Taxation

[LivingAlmostLarge]

My DH got his annual bonus finally, first time it was quite large. It was $14k but we saw $5477. Is that normal? We had a lot of taxes withheld, etc.

I thought we'd get back at least 60%, but oh well. Is it withheld at a lot higher bracket than normal?

[noppenbd]

The taxes seem way too high, can you break down exactly what was taken out? I don't know of any tax bracket where more than 60% is taken out (even including FICA).

[KTP]

I know he doesn't work for microsoft, since they don't give bonus this time of year, but here is one example of how you might see less than you think:

10,000 bonus

-1500 401k

-2380 28% federal tax

-637.5 SS tax

-187 medicare tax

-1200 ESPP plan

= 4095.50

[LivingAlmostLarge]

Bonus 13394
SS $830
Medicare $195
Federal $5357
State $1475
= $5400-$5500 deposited.

I guess it's that we withhold a lot because we're DINKS. So I we do 0 and then extra % month withholding. I freaked though at the numbers. It just looked like a lot, usually they withhold around 6% state and 25% federal but the bonuses about half the amount.

We'll hit FICA later this year and they will stop taking it out later on in the year. I have to add, I can't underwithhold, because I'm sure we're going to be close to breaking even again.

I tried that before and I owed around $5k. I usually make an end of the year payment to get us to owe under $1k. It's really hard to calculate.

This year I did a run through but I have to go back again, and we owe $230! I think we pay a pretty penny. And we got $120 refund from the state.

I'm always trying to make an estimate payment as well during the year if I think they aren't withholding enough.

[sweeps]

At a company I used to work for, bonuses were taxed at something like 40% as I recall, regardless of your salary. Does your husband also get a lot taken out for 401k? Along with state taxes, all this could get you close to 60%.

[MonkeyMama]

Um, interesting. The rule, which not all employers follow is 25% Fed withholding on bonus, no matter what. 28%, I believe, if you are in a higher tax bracket.

Our state taxes a flat 10% or something like that as well.

The thing that looks off to me is 40% Federal withholding. Yikes!

Then again, sometimes the software just is wrong. (It probably thinks your spouse is getting paid an additional $14k monthly, so thinks he is in some super huge tax bracket, and is making up for prior months). Really this is the issue most of the time - software is just not smart enough to handle bonuses.

You can beat the IRS at their game - lower your withholding for the rest of the year. (I usually get a small bonus every spring and withhold a little less the rest of the year so I don't get a big refund. Since my tax rate is like 5% as opposed to 25%. Nice try, IRS. This is perfectly legit. I just advise people to get their bonus first before adjusting their withholding down).

[simpletron]

Then again, sometimes the software just is wrong. (It probably thinks your spouse is getting paid an additional $14k monthly, so thinks he is in some super huge tax bracket, and is making up for prior months). Really this is the issue most of the time - software is just not smart enough to handle bonuses.

software is just following the stupid IRS rules.

http://www.irs.gov/pub/irs-pdf/p15.pdf

read Supplemental Wages, pages 13-14. if they use the 1b method, then it is suppose to think you are making 14K extra every paycheck. so a large percent of that bonus ends up being taxed at the 33% and 35% levels, still don't know how it got up to 40%. unless they being pre-emptive with obama raising taxes on the rich.

also the state taxes are at 11%, which state has that high of taxes? I thought california was the highest and it only goes up to 10.3%.

[LivingAlmostLarge]

I withhold extra because we're DINKS. So we do 0 and extra! That's probably why it happened.

It just withheld a very high amount for the state I think because we also withhold extra there as well.

Would that be the reason? I know that with 0 we don't hold back enough so I made my DH fill in the paperwork with something to hold extra every month.

[jIM_Ohio]

Either way, come tax time, this will all even itself out.

If they witheld more now (40% as indicated by previous poster), if this is too much, you will get it back when you file your federal return.

My advice would be to change withholdings in September once you have an idea what 3/4 of your tax bill looks like (do tax planning last 3 months of the year).

[blankcheck]

I withhold extra because we're DINKS. So we do 0 and extra! That's probably why it happened.

It just withheld a very high amount for the state I think because we also withhold extra there as well.

Would that be the reason? I know that with 0 we don't hold back enough so I made my DH fill in the paperwork with something to hold extra every month.

Wow. If you're getting a high refund at tax time and your income is stable besides the bonus, just adjust your witholding and keep the money each paycheck. No need to give the gov't a free loan over the course of a year.

[Daylily]

That does seem high. My bonuses usually have 40% withheld accounting for all the taxes.
I also have 401k contributions taken out of my bonus (but I don't mind that part!).

[m3racer]

I would just ask payroll to withhold at a certain %. For example, you can have them withhold at 28%-30%. It's a pia for them but they will accommodate you.

[LivingAlmostLarge]

Typically we owe. We will owe $240 this year! I got very close! With this large taxation we might be able to not owe. 0 withholdings is not enough by a long shot for some reason.

Jim, I will definitely be looking at where we are at by September. We have a lot of things changing and maybe we'll owe less this year.