I never understood "don't give me my bonus in 1 big check" re: taxes

[TheNinja]

I always hear people bitch and moan if they get a big bonus all in one check about how much taxes they lost. Or people saying to spread their bonus out over 3 months so they don't get hit with so much tax.

Am I wrong here or does it really not matter at the end of the year? When I do my taxes I put down how much I made for the year and I pay a certain % on that. I don't pay more tax if I made all my money in 1 week than I would if I made it all in 52 weeks.

 

[KK]

it doesn't matter.

 

[child of wonder]

When you get a paycheck you are taxed as if that's how much you make every check.

In other words, if you get paid once a month with a $1,000 paycheck, the government taxes that check as if you made $12,000 per year. If one of those checks is $2,000, the government taxes that single paycheck as if you made $24,000 per year.

 

[Ns1]

it doesn't matter at the end of the year, but it most certainly matters from a cash flow perspective

 

[sactoking]

I'm sure Fern or CPA can confirm or deny this, since I'm rusty on my personal tax.

Bonus withholding is calculated based on the marginal rate assuming you were to receive that bonus every pay period through the year. So if you get paid monthly and get a one-time bonus of $5,000 the bonus is withheld as if you get paid $60,000. If you split the bonus into 5 monthly payments of $1,000 each, each one gets withheld at the $12,000 rate.

 

[TheNinja]

When you get a paycheck you are taxed as if that's how much you make every check.

In other words, if you get paid once a month with a $1,000 paycheck, the government taxes that check as if you made $12,000 per year. If one of those checks is $2,000, the government taxes that single paycheck as if you made $24,000 per year.

I'm sure Fern or CPA can confirm or deny this, since I'm rusty on my personal tax.

Bonus withholding is calculated based on the marginal rate assuming you were to receive that bonus every pay period through the year. So if you get paid monthly and get a one-time bonus of $5,000 the bonus is withheld as if you get paid $60,000. If you split the bonus into 5 monthly payments of $1,000 each, each one gets withheld at the $12,000 rate.

Right, but at the end of the year you made the exact same amount of money whether you make a $12k bonus one month or $1k bonus each month. So basically you'll get some of the "bonus tax" back...or have it applied to what you owe. I think.

 

[Red Squirrel]

You end up paying more taxes because you hit a bigger tax bracket. So your $2000 bonus is actually more like $900 extra on the pay, if that.

My company did this and it pissed me off. But now it's not an issue... we don't even have a bonus at all anymore! Sucks for managers because they can't use it against us anymore. "Make sure you meet the SLA or you wont get a bonus" "What bonus?"


Though, at the end of the year, not sure if it really matters as all that gets fixed with your tax return.

 

[mwtgg]

Bonuses should be withheld at the supplemental rate of 25%. Notice I said withheld, not taxed. Think about it. There's not a separate line on your W-2 for bonus payments. In the end, they're taxed identically to your wages.

People are stupid.

 

[JS80]

it doesn't matter at the end of the year, but it most certainly matters from a cash flow perspective

^this.

Plus calendar year deferment game if the situation fits

 

[JulesMaximus]

I always hear people bitch and moan if they get a big bonus all in one check about how much taxes they lost. Or people saying to spread their bonus out over 3 months so they don't get hit with so much tax.

Am I wrong here or does it really not matter at the end of the year? When I do my taxes I put down how much I made for the year and I pay a certain % on that. I don't pay more tax if I made all my money in 1 week than I would if I made it all in 52 weeks.

Bonus checks are generally taxed at a supplemental tax rate to ensure that enough tax is withheld.

It will even out when you file your taxes.

 

[TheNinja]

Bonus checks are generally taxed at a supplemental tax rate to ensure that enough tax is withheld.

It will even out when you file your taxes.

Ya, that's what I"m saying. I don't get people who are like "oh man, i just got my bonus and lost like 55% to taxes...what a crock.". I'm like "no, you didn't lose 55% to taxes, you'll get some back at the end of the year...or just adjust your withholdings from here on out to get close to $0 by end of year". They usually just look at me like "WTF?". I guess if you were investing that money you lost the potential income from being unable to invest it for the remainder of the year. But like I said, you can adjust your W4 and withhold nothing for the next 2 months to make up for it if you really want.

 

[JS80]

Ya, that's what I"m saying. I don't get people who are like "oh man, i just got my bonus and lost like 55% to taxes...what a crock.". I'm like "no, you didn't lose 55% to taxes, you'll get some back at the end of the year...or just adjust your withholdings from here on out to get close to $0 by end of year". They usually just look at me like "WTF?". I guess if you were investing that money you lost the potential income from being unable to invest it for the remainder of the year. But like I said, you can adjust your W4 and withhold nothing for the next 2 months to make up for it if you really want.

If you're in the top rate though you are losing that much to the government.

 

[Bignate603]

Ya, that's what I"m saying. I don't get people who are like "oh man, i just got my bonus and lost like 55% to taxes...what a crock.". I'm like "no, you didn't lose 55% to taxes, you'll get some back at the end of the year...or just adjust your withholdings from here on out to get close to $0 by end of year". They usually just look at me like "WTF?". I guess if you were investing that money you lost the potential income from being unable to invest it for the remainder of the year. But like I said, you can adjust your W4 and withhold nothing for the next 2 months to make up for it if you really want.

I've told a few people that and they either think I'm crazy or some kind of financial genius. Apparently very few people realize that you can change your withholdings midyear to deal with stuff like this.

 

[yh125d]

If you're in the top rate though you are losing that much to the government.

If you're making that much money, you know a thing or two about paying taxes and don't need ATOT to show you that it doesn't much matter

 

[KidNiki1]

I've told a few people that and they either think I'm crazy or some kind of financial genius. Apparently very few people realize that you can change your withholdings midyear to deal with stuff like this.

yeah, you can pretty much claim whatever you want to adjust your taxes, you just have to be prepared at the end of the year to pay what you owe if you dont have enough withheld.

i used to change my fed withholding to zero the two or three paychecks right before christmas time to help with buying presents. it was some nice extra spending money but not enough of a change to make me owe any taxes

just ffs dont forget to change it back the next year, lol.

 

[waffleironhead]

Around a month before bonus time I would refile and claim tax exempt status. Once I received my full bonus check, I would then refile to the usual rate. It worked like a charm.
I'm not loaning uncle sam anything.

 

[DrPizza]

Around a month before bonus time I would refile and claim tax exempt status. Once I received my full bonus check, I would then refile to the usual rate. It worked like a charm.
I'm not loaning uncle sam anything.

This is the way to do it. (well, not necessarily tax exempt though) - but change your withholdings BEFORE the bonus, not after the bonus. i.e. if you receive your bonus in March, you'll be gradually getting that money between March and December if you change your withholdings afterward. OR, you'll be waiting 11 months to get back the extra money in the bonus after you file your tax return.

 

[the DRIZZLE]

Around a month before bonus time I would refile and claim tax exempt status. Once I received my full bonus check, I would then refile to the usual rate. It worked like a charm.
I'm not loaning uncle sam anything.

As long as you don't significantly underpay your taxes that's fine. If you underpay a lot two years in a row they charge you penalties.

 

[darkxshade]

What a bunch of suckers... I told my boss not to give me my bonus and he gives me this dumb look. Come bonus time, they'd all be complaining about paying more tax while I laugh in their faces... Then they'd give me the dumbfounded look again. Who hired these idiots?

 

[HardcoreRobot]

You end up paying more taxes because you hit a bigger tax bracket. So your $2000 bonus is actually more like $900 extra on the pay, if that.

My company did this and it pissed me off. But now it's not an issue... we don't even have a bonus at all anymore! Sucks for managers because they can't use it against us anymore. "Make sure you meet the SLA or you wont get a bonus" "What bonus?"


Though, at the end of the year, not sure if it really matters as all that gets fixed with your tax return.

you dont understand how tax brackets work. and even if a high check was withheld at a higher rate it will come back when you file your return

 

[JulesMaximus]

Around a month before bonus time I would refile and claim tax exempt status. Once I received my full bonus check, I would then refile to the usual rate. It worked like a charm.
I'm not loaning uncle sam anything.

Your filing status doesn't apply to bonus checks paid out separately from your regular pay. They will still tax you at the supplemental withholding rate regardless of your filing status if this is the case...and your payroll department has half a brain and knows what the fuck they're doing.

If the bonus is $500 then yeah, they can pay it along with your normal pay and/or not tax you at the supplemental rate. If it is $25,000+ then they'd be stupid to lump it in with your normal paycheck and not tax it at the supplemental rate.

 

[waffleironhead]

Your filing status doesn't apply to bonus checks paid out separately from your regular pay. They will still tax you at the supplemental withholding rate regardless of your filing status if this is the case...and your payroll department has half a brain and knows what the fuck they're doing.

It worked. So I'm not complaining. Apparently the payroll department doesn't know wtf they are doing.

 

[JulesMaximus]

It worked. So I'm not complaining. Apparently the payroll department doesn't know wtf they are doing.

How much was the bonus?

 

[waffleironhead]

How much was the bonus?

The first year I did it was ~1500, next ~2250, then the last year ~3000. The regular pay was only ~600 week.

 

[Nik]

it doesn't matter at the end of the year, but it most certainly matters from a cash flow perspective

It also matters when tax returns are basically the money you've been lending to the government for the year where they don't have to pay you any extra even though they've made money on having it.

You're giving uncle sam a 0% loan.