Why are bonuses taxed so high?

[Myron_Nismo]

I don't really understand. I only received 60% of my bonus after tax.withholding. I am definitely not in the top tax bracket so im kind of confused. How does this work?

[theDreamer]

Here is some info to help.

For most taxpayers, the IRS treats bonus income the same as regular income. All taxable W-2 income gets added together in one box when you file your federal tax return forms, and the same tax rates apply. There is a catch, and this is why confusion is rampant: While the IRS doesn’t discriminate between regular pay and bonus pay, employers often do.

Employers can choose between two methods of withholding federal taxes from bonus or supplemental income when it is given to the employee in a check or direct deposit separate from regular income.

Option 1. The employer may withhold a flat 25% for federal income taxes from the bonus payment. If the employee receives over $1 million in bonus payments in one year, the employer can withhold 35% from the amount over $1 million in addition to 25% of the first $1 million.

Option 2. The employer may add the bonus payment to the most recent regular income payment, determine the standard withholding based on tax tables and the sum of the two payments, subtract the amount already withheld from the most recent regular income payment, and withhold the rest from the bonus.

The third option is for employers who choose to combine bonus compensation with regular compensation in one payment, check or direct deposit, without any differentiation between the two types of income.

Option 3. The employer may base withholding on the sum of the bonus and regular pay using the standard withholding tables.

[Cmike2780]

That sounds really high. It should be around 25% from the federal level I think, plus state, ss & medicare. I'm guessing your employer may have withheld more than they needed to. You may be able to get some of it back assuming a portion didn't go to a 401k or something. I don't know a whole lot about this topic to be honest.

[Zaggeron]

I see the same thing with my bonus. I get a separate bonus check, but dated the same as my last paycheck in December. I always figured they withheld Fed taxes on it as if it were a regular paycheck. But if that were my regular paycheck, I would be in a much higher tax bracket so I expect the withholding to be significantly higher for the bonus check.

[tibal]

Same thing for mine. In "Taxachusetts" I only got 60% of our yearly bonus. Looks good on paper, then that direct deposit in my account REALLY shows how much the good ole gov't takes.

[Zaggeron]

Note guys that what is withheld is different than what you have to pay in taxes. If extra withholding is taken from your bonus, you'll get the extra back in your tax return -- your bonus itself is just regular income that gets added to your salary. You owe taxes on your total income not one set of taxes on your salary and another different rate on your bonus ...

[w0rM]

That's about what I got for my bonus too.

[Spikuh]

Originally Posted by Zaggeron

Note guys that what is withheld is different than what you have to pay in taxes. If extra withholding is taken from your bonus, you'll get the extra back in your tax return -- your bonus itself is just regular income that gets added to your salary. You owe taxes on your total income not one set of taxes on your salary and another different rate on your bonus ...

This.

[Jasonle]

Originally Posted by w0rM

That's about what I got for my bonus too.

Me too.

[Zaggeron]

It's easy to see why people would get around 60% back. Say you get paid twice a month -- 24 times a year and you get a year-end bonus of $7500. $7500 x 24 = 180,000. So your bonus may have taxes withheld as if you were making 180,000 a year. The bracket for that in 2012 was 33%. Add social security and medicare and you are pretty damn near 40%.

[Myron_Nismo]

Originally Posted by Zaggeron

It's easy to see why people would get around 60% back. Say you get paid twice a month -- 24 times a year and you get a year-end bonus of $7500. $7500 x 24 = 180,000. So your bonus may have taxes withheld as if you were making 180,000 a year. The bracket for that in 2012 was 33%. Add social security and medicare and you are pretty damn near 40%.

Oh is that how it works? Interesting...I guess that makes sense. So I guess I should just expect to get that back in my tax refund.

[kenchan]

Originally Posted by Myron_Nismo

I don't really understand. I only received 60% of my bonus after tax.withholding. I am definitely not in the top tax bracket so im kind of confused. How does this work?

you make money, you give a good portion to taffyapples.

welcome to the club.

[Mitco39]

Where you really notice it is when you run your own business. You do all the work to make the money but then you have to give 30-40% of it away so the government can spend it on things like their salaries and giving it to welfare. I hate tax season :/

[kenchan]

Originally Posted by Mitco39

Where you really notice it is when you run your own business. You do all the work to make the money but then you have to give 30-40% of it away so the government can spend it on things like their salaries and giving it to welfare. I hate tax season :/

^^ says the googler living in another country outside USA...

[Mitco39]

Originally Posted by kenchan

^^ says the googler living in another country outside USA...

lol you troll. We pay comparative taxes I am sure. I calculated my business earnings to be taxed at about 32-33 percent. Now if I could use google to somehow get around this I would be golden! haha