Bonus Deductions

Dear, Anita,

I just got a year-end holiday bonus check and I’m grateful, but confused. The amount taken out for taxes seems way too high. It seems to be a greater percentage than my usual paycheck deductions. What’s up with that?

Dear, Bob Cratchitt,money

Oh, joy! Oh… wait! I hear this concern about bonus checks often. Uncle Scrooge… excuse me, Uncle Sam may be to blame. The IRS views bonuses (as well as commissions, overtime, even things like employer-paid moving expenses) as “supplemental wages.” Employers may use either a flat 25% withholding rate or an aggregate method. The aggregate method combines the bonus amount with the most recent regular wage paycheck. Then, the normal withholding amount based on IRS tables is determined for the total of both amounts. Your payroll department subtracts what was already withheld from your last paycheck and withholds the rest from the bonus amount.

The aggregate method, while more cumbersome, is actually the more accurate method of determining your actual tax liability. Pay now or pay later – April 15th, to be exact. (Not-so-fun fact: the average American works the first 111 days of the year – or to just past Tax Day – to pay their taxes.) The good news is that if the withholding at the higher rate was actually too much, you’ll be refunded when you file your tax returns.

Man doing his accounting, financial adviser workingSpecial rules apply to bonuses of $1 million or more (don’t you wish you had that “problem?”), and they are bumped into the 39.6% withholding rate.

Before you go out to spend your anticipated bonus, use the AmCheck Flat-Rate or Aggregate Bonus Calculator. Remember, in addition to the federal taxes, bonuses are also subject to withholding for Social Security, Medicare, and any state and local taxes.

Readers: Did you get a holiday or year-end bonus this year? What are your plans for the windfall?

Do you have a job-related question? Ask Anita.

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3 Comments (+add yours?)

  1. MaLynn
    Dec 16, 2014 @ 17:08:26

    Anita, I had the same issue when I got my first bonus years ago. I was IRRITATED!!! I had plans for ALL of my bonus. Here’s what I found out…The IRS specifies a flat “supplemental rate” of 25%, meaning that any supplemental wages (including bonuses) should be taxed in that amount. If you receive a $5,000 bonus, under this rule, $1,250 (25% of $5,000) goes straight to the IRS. That is over an beyond the normal taxes that is also deducted.

    Reply

  2. Varena
    Dec 16, 2014 @ 09:58:24

    My husband and I faced a similar situation this year. He was laid off from his job and given severance pay in addition to what he could receive from state unemployment. Not bad, right? But wait! When we received his severance check, HALF of it was taken as various state and federal taxes! We learned that even though he no longer had a job, the severance was considered salary over and above his usual wages, and therefore for tax purposes, considered capital gains. It put a lot more pressure on us, and set us up to take anything as soon as possible because we didn’t have most of that check, which with unemployment, could have given us survivability for 6-9 months instead of 3-6. We hope to get much of it back next year when we file taxes, but in the meantime, we left our hometown and ended up taking a job on the other side of the country because we couldn’t wait (financially) for more leads to open.

    Reply

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Anita Clew's blog posts are intended for general guidance and should never be taken as legal advice. In all instances where harassment, inequity, or unfair treatment is believed to be present, please consult your HR Department or legal representation.
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