Figuring out Withholding for a Bonus Early in the Year

[phantom]

I find myself in a peculiar situation today. The company I've been working for just sold for a sizable sum of money. As a result, I'll be out of a job in a week, but I have a huge profit sharing/severance check headed my way. I plan to look for another job. I also plan to max out my 401k and HSA now, just in case I don't get another job that lets me do those things this year.

The pressing question for me right now is what to ask my employer to do with regards to the tax withholding on my profit sharing check. Our payroll person has said she will put these checks through as though they are normal paychecks and that she'll adjust our withholding however we like. I assume that if I make no adjustments, I'll have more than I should withheld. But, I'm not sure how to figure out how to ask her to adjust it. It's especially tricky since it's hard to guess how much more money I'll make this year.

What would you do: Nothing other than wait for a big refund in 2017? Crunch some numbers and make a guess? Hire a professional?

I don't feel comfortable posting exact numbers, but I'll share via PM if anyone wants to help me figure it out.

[snafu]

I'm sorry your employment is ending so abruptly. It's important to get as much factual information as possible. Has HR given details in writing? Perhaps this is not 'severance' in the usual sense. Is it deemed capital gains if stock is being sold on your behalf? 2nd, can you verify IRS sees this as 'earned income' for 401K contribution? Can the payout transfer directly to a retirement fund without being taxable? Also the market is so unsettled just now, I'd look to DCA into specific product 401K [interim MM].

I'm sure you can transfer payment to IRS like those who make quarterly payments when things 'shake-out' a bit. Sure better than awaiting a tax refund February/March 2017 when you are about to face a period of employment uncertainty. Will you get outplacement services? What can you expect in vacation pay or other benefits? Was life insurance one of your benefits?

Have you updated your resume? Who will you chose for references? It's important to seek their support. Do you plan to sign with an agency [headhunter]? If you are eligible for unemployment insurance benefits? It's important to sign up as soon as employment ends as there are waiting periods and rules galore! It's important to get correct information asap as there is so much crazy misinformation. I hope you'll use whatever services they have on offer..

[Petunia 100]

If it were me, I'd base the withholding on my regular paychecks. For example, if you usually earn 1k per week and the profit sharing is 10k, then multiply your usual federal and state withholding by 10 and ask payroll to withhold that amount.

[kv968]

First, sorry to hear about your job loss.

I'd just keep it simple and suggest telling her to withhold an amount equivalent to whatever tax bracket you'd be in had you not lost your job. So if you were in the 25% tax bracket say, have her withhold that much (like what Petunia said).

Granted your effective tax rate isn't the same as your nominal and you might not get a job right away, be in the same tax bracket if you do or don't, etc... but at least that way you're kinda covered either way. You really don't want to be taxed at the max and have to wait for that money at the end of the year but then you also don't just want to take the "lump sum" and be on the hook for all those taxes either.

[feh]

Another vote for treating it like any other paycheck.

If you want more flexibility, you could pay estimated taxes in April.

[tripods68]

Sorry about the job loss.

I think the decision for me whether to contribute to retirement account will determine how fast I can secure a new job. The longer it will take for you to get a new job, the less inclined I'd contribute to retirement.

Do you have enough savings/EF to pay minimum bills (mortgage, bills, food, etc) for at least 6 months? If not, then I would hoard all this cash for now--as cushion in case you don't get a new job right a way. To me, this is a type of emergency that you didn't plan so I would qualify this as Emergency. Stop all retirement contributions, pay bills at minimum. Once you get the new job, I'd restart investment contributions towards retirement again.

[LivingAlmostLarge]

Ask for zero withholding then send in payment. That's what my DH usually tried to do with large bonus checks. 6 figures? Or 5?

[phantom]

Thanks for all of the advice! The latest news is that we might not have an option on how much tax gets taken out of our bonus after all. It might just be 25%. But, I updated my Excel tax calculator and have a good idea of my potential marginal and effective tax rates. So, if I do get the choice, I have a better idea of what to ask for.

Has HR given details in writing? Perhaps this is not 'severance' in the usual sense. Is it deemed capital gains if stock is being sold on your behalf? 2nd, can you verify IRS sees this as 'earned income' for 401K contribution? Can the payout transfer directly to a retirement fund without being taxable? Also the market is so unsettled just now, I'd look to DCA into specific product 401K [interim MM].

So far all I've gotten is a slip of paper from the former owner/CEO with numbers on it. I'm supposed to get an agreement to sign today or tomorrow. The severance part of what I'm getting is definitely severance in the traditional sense (half a month's pay per year of service). Then there's the incentive compensation, which is being paid with cash from the sale of the company. There was no selling of stock, and I have no reason to think this won't count a regular income. Someone from the payroll company that manages our 401k company will be out this week to talk to us about 401k contributions. Looking at the 401k web site there's no easy way to dollar cost average the money into funds. But, I plan on rolling everything into an IRA anyway, as the fees in the 401k are pretty high.

Will you get outplacement services? What can you expect in vacation pay or other benefits? Was life insurance one of your benefits?

No one has mentioned pay for unused vacation, so I'm not expecting any. What I am getting is generous enough, that I'm not going to nitpick about whether or not unused vacation is being paid out. Health insurance will run through the end of the month, then we'll probably switch to the plan through my husband's employer. We just hit our deductible in December and our plan runs through May, so I'm tempted to go with COBRA, but I don't think that's going to make sense. Life insurance was a benefit, but the amount was negligible.

Have you updated your resume? Who will you chose for references? It's important to seek their support. Do you plan to sign with an agency [headhunter]? If you are eligible for unemployment insurance benefits?

I finished updating my resume over the weekend, and I've already talked to three recruiters and applied for four jobs. My soon-to-be-former co-workers and I have great relationships and many people have offered good recommendations. I will be eligible for unemployment compensation, but I'm going to look into what I need to do later in the week. I want to get the ball moving on finding a new job first.

Do you have enough savings/EF to pay minimum bills (mortgage, bills, food, etc) for at least 6 months? If not, then I would hoard all this cash for now--as cushion in case you don't get a new job right a way. To me, this is a type of emergency that you didn't plan so I would qualify this as Emergency. Stop all retirement contributions, pay bills at minimum. Once you get the new job, I'd restart investment contributions towards retirement again.

My husband has a fairly stable job that can cover all of our necessary expenses, and our emergency fund is in good shape. Furthermore, even if I get taxed at 25% and max out my 401k and HSA, I'll still be seeing more money in my checking account all at once than I typically bring home in a year. I will need to work again at some point, and I don't think it would be wise to spend the entire windfall without having another job lined up. But, I can definitely afford the tax advantaged savings.

6 figures? Or 5?

6 figures