Taxes on bonuses

[Anonymous]

I am far from an expert on taxes. As a company, we do bonuses (like many) but we have one employee that complains about how much tax is taken out of his bonus(es). Is there anything we or he could/should do differently? I'd just come to terms many years ago that bonuses are taxed at a higher rate and that was that. Thoughts?

[Anonymous]

The taxes can’t be helped, but he can reduce his 401k contribution temporarily so that his bonus isn’t also hit by a large % going to 401k.

As far as the taxes, you can help him understand that some of it may come back with his refund.

Likely he’s just new to this and having sticker shock. I remember my first bonus, hearing was getting X and then seeing the actual payout was a little disappointing!!

[Anonymous]

Tell him to adjust his withholding on future paychecks. I would not change the method of using the supplemental rate. A company should not adjust their payroll practices for one person.

[Anonymous]

Anonymous wrote:The taxes can’t be helped, but he can reduce his 401k contribution temporarily so that his bonus isn’t also hit by a large % going to 401k.

As far as the taxes, you can help him understand that some of it may come back with his refund.

Likely he’s just new to this and having sticker shock. I remember my first bonus, hearing was getting X and then seeing the actual payout was a little disappointing!!

OP here ... no, he's like 40! He should know this by now. That's why I'm wondering if I've missed something all these years haha

[Anonymous]

Bonuses are not taxed at a higher rate. They are taxed the same as any other W2 income. The withholding may be higher or may be lower that the regular salary, but that has nothing at all to do with the amount of the tax. Why does this myth continue to persist?

[Anonymous]

Anonymous wrote:I am far from an expert on taxes. As a company, we do bonuses (like many) but we have one employee that complains about how much tax is taken out of his bonus(es). Is there anything we or he could/should do differently? I'd just come to terms many years ago that bonuses are taxed at a higher rate and that was that. Thoughts?

Bonuses are treated as supplemental income and taxed at a flate rate of 22% by the Fed. Depending on his tax bracket he may get a refund at the end of the year or end up owing more. It all comes out in the wash at the end of the year when you do your taxes. Nothing you can do about it besides increase base salary, which is great for the individual, but not something an employer will want to do as they carry that base into the next year.

[Anonymous]

Anonymous wrote:

Anonymous wrote:I am far from an expert on taxes. As a company, we do bonuses (like many) but we have one employee that complains about how much tax is taken out of his bonus(es). Is there anything we or he could/should do differently? I'd just come to terms many years ago that bonuses are taxed at a higher rate and that was that. Thoughts?

Bonuses are treated as supplemental income and taxed at a flate rate of 22% by the Fed. Depending on his tax bracket he may get a refund at the end of the year or end up owing more. It all comes out in the wash at the end of the year when you do your taxes. Nothing you can do about it besides increase base salary, which is great for the individual, but not something an employer will want to do as they carry that base into the next year.

OP here, this is how I understood it too and how I tried to explain it to him. These are performance base bonuses too (business development based), not like a flat 15% every year or whatever.

[Anonymous]

Anonymous wrote:

Anonymous wrote:I am far from an expert on taxes. As a company, we do bonuses (like many) but we have one employee that complains about how much tax is taken out of his bonus(es). Is there anything we or he could/should do differently? I'd just come to terms many years ago that bonuses are taxed at a higher rate and that was that. Thoughts?

Bonuses are treated as supplemental income and taxed at a flate rate of 22% by the Fed. Depending on his tax bracket he may get a refund at the end of the year or end up owing more. It all comes out in the wash at the end of the year when you do your taxes. Nothing you can do about it besides increase base salary, which is great for the individual, but not something an employer will want to do as they carry that base into the next year.

No, this is incorrect. All income is taxed the same. Depending on how 'supplemental' income is paid, it may or may not be subject to a different withholding rate. The supplemental income withholding rate may be higher or lower than your ordinary income withholding rate, which could result in a tax refund or tax bill at the end of the year. While you sort of get to the right answer at the end, you need to understand that withholding rates are not the same as tax rates.

[Anonymous]

Anonymous wrote:I am far from an expert on taxes. As a company, we do bonuses (like many) but we have one employee that complains about how much tax is taken out of his bonus(es). Is there anything we or he could/should do differently? I'd just come to terms many years ago that bonuses are taxed at a higher rate and that was that. Thoughts?

This is on your HR. You could pay the bonus with his regular wages for a pay period and treat the entire payment as one payment of regular wages and withhold at his ordinary rate. That's what he's asking you to do.

[Anonymous]

Anonymous wrote:The taxes can’t be helped, but he can reduce his 401k contribution temporarily so that his bonus isn’t also hit by a large % going to 401k.

As far as the taxes, you can help him understand that some of it may come back with his refund.

Likely he’s just new to this and having sticker shock. I remember my first bonus, hearing was getting X and then seeing the actual payout was a little disappointing!!

Totally depends on his tax bracket. He could end up owing more if under withheld.

Withholding for taxes is 24%. Top marginal tax rate is 37%.

But he would have to make a ton. And usually people in that bracket have a more sophisticated understanding about how taxes work and likely aren’t whining about withholding.

[Anonymous]

Anonymous wrote:

Anonymous wrote:I am far from an expert on taxes. As a company, we do bonuses (like many) but we have one employee that complains about how much tax is taken out of his bonus(es). Is there anything we or he could/should do differently? I'd just come to terms many years ago that bonuses are taxed at a higher rate and that was that. Thoughts?

Bonuses are treated as supplemental income and taxed at a flate rate of 22% by the Fed. Depending on his tax bracket he may get a refund at the end of the year or end up owing more. It all comes out in the wash at the end of the year when you do your taxes. Nothing you can do about it besides increase base salary, which is great for the individual, but not something an employer will want to do as they carry that base into the next year.

None of this is accurate. Not even remotely. There is no “flat rate tax” of 22% on supplemental income. It’s not a thing.

A bonus is subject to withholding taxes when paid. The actual tax owed depends on your top marginal income tax rate, which may be higher or lower depending on your overall taxable income.

This really isn’t hard.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:I am far from an expert on taxes. As a company, we do bonuses (like many) but we have one employee that complains about how much tax is taken out of his bonus(es). Is there anything we or he could/should do differently? I'd just come to terms many years ago that bonuses are taxed at a higher rate and that was that. Thoughts?

Bonuses are treated as supplemental income and taxed at a flate rate of 22% by the Fed. Depending on his tax bracket he may get a refund at the end of the year or end up owing more. It all comes out in the wash at the end of the year when you do your taxes. Nothing you can do about it besides increase base salary, which is great for the individual, but not something an employer will want to do as they carry that base into the next year.

No, this is incorrect. All income is taxed the same. Depending on how 'supplemental' income is paid, it may or may not be subject to a different withholding rate. The supplemental income withholding rate may be higher or lower than your ordinary income withholding rate, which could result in a tax refund or tax bill at the end of the year. While you sort of get to the right answer at the end, you need to understand that withholding rates are not the same as tax rates.

No, all income is not taxed the same, pp. I know what you are trying to say but this is wrong.

You mean wages, I believe. But that is subject to progressive marginal income tax rates, for starters.

Income from capital is subject to very different income tax rules than wages.

Partnership income similarly treated differently.

[Anonymous]

They aren’t taxed at a higher rate, but taxed as if you earn that much every two weeks. You can adjust your deductions with payrolls in the weeks before if you want less taken out.

[Anonymous]

Anyone a tax accountant on here?

[Anonymous]

This article explains a lot of what the pp’s stated above. If your employer treats it as supplemental income, withholding is 22% (unless it’s over $1 million in which case the withholding is 37%). If your employer treats it as an addition to your regular paycheck, it is at your current withholding rates (although if large enough, it could bump up your rate). If added to your paycheck, social security and Medicare are also withheld.

https://www.kiplinger.com/taxes/how-a-bonus-is-taxed