Could someone please explain how the taxing of bonuses works?
My wife has a bonus that’s a fair chunk of her yearly income (we file married, together, fwiw).
I’ve noticed her bonus are cut basically in half by the time taxes are taken out and she gets them deposited. I know bonuses are taxed at a high rate than salary, but does it all net out in the end? Meaning, at the end of the tax year when our tax guy does his magic, does he calculate our income as one net sum (mine, hers and her bonus) and apply a tax % to the whole thing? In which case we’d get more money back (theoretically) since she paid in a high percent on the bonuses, or does he apply a % to our salaries, and then separately apply a % to the bonus?
This is often a payroll issue, if the payroll department is not “savy.” Typically, payroll checks are issued every 2 weeks (give or take). So, the software looks at the amount being paid, multiplies that by 26 (pay peroids) and determines what the yearly salary will be. From there, the amount of withholding is determined, based on the IRS charts.
If you run a bonus check through payroll, you can get over-inflated withholding. Assume your normal payroll check is $2,000. That comes out to $52,000/year. Withholding is calculated off that amount. But, if you run a $10k bonus through payroll, suddenly, the software thinks you make $260,000 per year and withholds far too much.
In the end, the bonus is added to your yearly salary and taxes are taken out. Often, too much is withheld from the bonus check, so, you get that back in your refund.
This is often a payroll issue, if the payroll department is not “savy.” Typically, payroll checks are issued every 2 weeks (give or take). So, the software looks at the amount being paid, multiplies that by 26 (pay peroids) and determines what the yearly salary will be. From there, the amount of withholding is determined, based on the IRS charts.
If you run a bonus check through payroll, you can get over-inflated withholding. Assume your normal payroll check is $2,000. That comes out to $52,000/year. Withholding is calculated off that amount. But, if you run a $10k bonus through payroll, suddenly, the software thinks you make $260,000 per year and withholds far too much.
In the end, the bonus is added to your yearly salary and taxes are taken out. Often, too much is withheld from the bonus check, so, you get that back in your refund.
This.
Your wifes company likes to give the government an interest free loan until you file your taxes.
Could someone please explain how the taxing of bonuses works?
My wife has a bonus that’s a fair chunk of her yearly income (we file married, together, fwiw).
I’ve noticed her bonus are cut basically in half by the time taxes are taken out and she gets them deposited. I know bonuses are taxed at a high rate than salary, but does it all net out in the end? Meaning, at the end of the tax year when our tax guy does his magic, does he calculate our income as one net sum (mine, hers and her bonus) and apply a tax % to the whole thing? In which case we’d get more money back (theoretically) since she paid in a high percent on the bonuses, or does he apply a % to our salaries, and then separately apply a % to the bonus?
Or something else?
Just curious.
2 things:
depending on how her company/payroll dept cut her check. Meaning if she is normally paid, for instance 2X per month, and they put her bonus check in under the same parameters the payroll system is going to assume she now makes X(bonus) as her base pay amount (so 24X bonus it assumes is new salary amount) and taxes it accordingly. In other words they didn’t switch to 1X per year to compute the tax (most likely).
next time you hear about the rich not paying their fair share remember what you said above. 50% is about right all taxes in for small business owners/high earners.
A bonus is ordinary income and will show on your w-2 with her “salary”. As for the withholding, that will all work out on your tax return. Most bonuses are withheld at the Federal statutory rate of 25% unless her income has hit $1.0 million then they begin to withhold more. They will take out state and social security if you haven’t hit the ~$115,000 limit, along with medicare, maybe local taxes, and possibly medicare surtax depending on your income.
“2) next time you hear about the rich not paying their fair share remember what you said above. 50% is about right all taxes in for small business owners/high earners.”
That goes for high wage earners, not the rich. The max capital gains rate is only 20%. The rich don’t take their money home in a paycheck.
Could someone please explain how the taxing of bonuses works?
My wife has a bonus that’s a fair chunk of her yearly income (we file married, together, fwiw).
I’ve noticed her bonus are cut basically in half by the time taxes are taken out and she gets them deposited. I know bonuses are taxed at a high rate than salary, but does it all net out in the end? Meaning, at the end of the tax year when our tax guy does his magic, does he calculate our income as one net sum (mine, hers and her bonus) and apply a tax % to the whole thing? In which case we’d get more money back (theoretically) since she paid in a high percent on the bonuses, or does he apply a % to our salaries, and then separately apply a % to the bonus?
Or something else?
Just curious.
2 things:
depending on how her company/payroll dept cut her check. Meaning if she is normally paid, for instance 2X per month, and they put her bonus check in under the same parameters the payroll system is going to assume she now makes X(bonus) as her base pay amount (so 24X bonus it assumes is new salary amount) and taxes it accordingly. In other words they didn’t switch to 1X per year to compute the tax (most likely).
next time you hear about the rich not paying their fair share remember what you said above. 50% is about right all taxes in for small business owners/high earners.
She’s paid 2x a month with the normal paychecks (15th and 31st of the month, or so). On the second pay period, she gets an additional check (the bonus, which varies depending on how the sales team does). So she gets 12 bonus checks per year of varying amounts and 24 paychecks that are always the same amount.
But, it looks like you guys answered my question and in the way I was hoping
“2) next time you hear about the rich not paying their fair share remember what you said above. 50% is about right all taxes in for small business owners/high earners.”
That goes for high wage earners, not the rich. The max capital gains rate is only 20%. The rich don’t take their money home in a paycheck.
I am happy to parse those two terms out as long as those trying to use the argument to their advantage in terms of taxing more are.
I am currently one of those things and hoping to become the other (depending on how you define it). In the process I assume 50% of all I earn will be taken by some form of taxing authority. Likewise I expect them to share equally in my losses. I make business decisions using this assumption. Most people thing that assumption is wildly outrageous. The OP just got a real world example
“2) next time you hear about the rich not paying their fair share remember what you said above. 50% is about right all taxes in for small business owners/high earners.”
That goes for high wage earners, not the rich. The max capital gains rate is only 20%. The rich don’t take their money home in a paycheck.
“2) next time you hear about the rich not paying their fair share remember what you said above. 50% is about right all taxes in for small business owners/high earners.”
That goes for high wage earners, not the rich. The max capital gains rate is only 20%. The rich don’t take their money home in a paycheck.
Better check your math on that 20% max capital gains rate - closer to 24%. If you are a CA resident, you can pay close to 40% on your long-term capital gains when factoring state taxes.
Well, you have to make over 450K to get hit by that rate. Also, if you are getting hit with that rate, there are lots of ways to get around it. Here is an article for starters:
Well, you have to make over 450K to get hit by that rate. Also, if you are getting hit with that rate, there are lots of ways to get around it. Here is an article for starters:
Bottom line, if your tax rate is anywhere near the theoretical maximum, you need to get a financial advisor.
Unfortunately I am a financial advisor who works with corporate executives and high net worth individuals, some in CA, and many fall into the 23.8% capital gains rate. Not many ways around it when your AGI is in the millions. CA is the worst state possible for top incomes. Heck, I have clients whose CA property taxes are more than I make.
Don’t disagree, but that is a small fraction of the 1%. Most folks with income near the cutoff can find ways to reduce their tax liability. There are exceptions, of course. I live in Silicon Valley, and most (not all) friends in that situation find ways to dramatically reduce their tax liability.
I’ve noticed her bonus are cut basically in half by the time taxes are taken out and she gets them deposited.
From your signature, I’m gonna assume you live in Brooklyn
25% federal withholding (this is an IRS imposed rate)
7.5% Fica (roughly)
6.5% NY state withholding (rough estimate)
3.5% NYC withholding (estimate)
???% 401k?
