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Is a bonus from my regular work considered as ordinary income and taxed accordingly, or does it have some special tax rate?

culcha
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Is a bonus from my regular work considered as ordinary income and taxed accordingly, or does it have some special tax rate?

It's taxed as ordinary income, but if it comes in a separate check* it will have different withholding rules. IIRC, my last bonus was withheld at 25% on the federal side, which nicely matched my marginal tax rate. But the State of New York withheld at the highest possible tax rate, something like 9.77%, which I'm nowhere near.

If the bonus is rolled into a regular check, the withholding is the same as if you had that much more regular salary in that pay period.

Patzer

* I say "check" even though my pay is really a direct deposit. I don't know what other short term to use.
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There might be special calculations for withholding on the bonus, but in 2012, when you get your 2011 W-2 and file your 2011 taxes, you'll find that the bonus income gets lumped with ordinary income and taxed accordingly.

DD's complaint, every time she gets her (semi-annual) bonus, is that "half" (I'm taking her word on that) is withheld for taxes.
me: "Don't you like getting a big refund in April?"
DD: "Yes."
me: "You could adjust withholding to get a bigger net bonus, but then your refund will be less. So it's just a question of whether to get your money now or later, it's the same amount in the end."
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it's the same amount in the end.

I do not think it is the same. If you arrange for minimum refund, you get to hold the float, but if you get the maximum refund, the government gets to hold the float.
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If the bonus is rolled into a regular check, the withholding is the same as if you had that much more regular salary in that pay period.

It doesn't even necessarily have to be a 'separate check' - as long as the bonus is identified as a separate line item on the check, it is allowed to be withheld at the 25% 'bonus withholding' rate by the Feds, not the marginal rate. This has been the case for bonuses paid to me for at least the last several years (not that I get a physical check either - just a check statement that I can look at on a website).

IRS Pub 15 http://www.irs.gov/pub/irs-pdf/p15.pdf says:
Supplemental wages combined with regular wages. If you pay supplemental wages with regular wages but do not specify the amount of each, withhold federal income tax as if the total were a single payment for a regular payroll period

Supplemental wages identified separately from regular wages. If you pay supplemental wages separately (or combine them in a single payment and specify the amount of each)
.... and goes on to give some additional information about how to withhold, where the 25% rate is given as an option.

In states that charge income tax, there may be a requirement for the payments to be separate checks/deposits in order for bonuses to get separate withholding.

AJ
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If you arrange for minimum refund, you get to hold the float, but if you get the maximum refund, the government gets to hold the float.

And based on today's short term interest rates, the difference is material??


I used to think that everyone should try to avoid getting a large refund every year. After doing taxes for the last 25+ years, I've discovered that everyone is not the same. (Imagine that, we're all different.)

For some, the advantage of the enforced savings outweighs the loss from the float.

--Peter
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And based on today's short term interest rates, the difference is material??

As you said, we are all different. If the person in question is getting a $1 billion bonus, even today's pathetic interest rates may matter. I am not one who ever got a bonus at all, but a few do. Of course, I doubt anyone in that position would be getting tax advice here.
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For some, the advantage of the enforced savings outweighs the loss from the float.

You are spot on about that Peter. This is the ONLY way I can get DW to save any money. Sad but true.

Rich
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