I feel like my bonus is being taxed too much

Submitted by dragunight t3_10q0mt1 in personalfinance

I live in IL. I recently received a bonus for around $48,067.15. In my paystub, it said taxes paid totaled $21,597.40.

The breakdown of these taxes were as follows:

  • FEDERAL INCOME TAX $15,585.49
  • MEDICARE - EE $696.98
  • SOCIAL SECURITY - EE $2,980.16
  • IL INCOME TAX $2,334.77

Maybe I'm missing something, but doesn't the federal income tax seem especially high? For supplemental income, I'm pretty sure the tax rate is something like 22%. So shouldn't the federal tax coming out of this bonus only be like ~10k?

Please help me understand what's going on. Thank you!

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wijwijwij t1_j6n3cmd wrote

I think there are two ways for computing taxes on bonuses.

If the bonus was {treated as if} tacked onto a regular paycheck, the dumb withholding algorithim annualizes that one paycheck as if it were standard pay for every paycheck in a full year. That would make it think your income for the year is huge and withholding should be very high.

If that's what happened, you get a refund when you do your taxes, because the actual tax on your overall income isn't as high as the withholding algorithm calculated.

You could adjust a new W-4 to force a little less withholding during rest of the year from each pay check. The steps to do are a little convoluted to describe, so you might let the online tool at www.irs.gov/w4app help you out. You can pretend you had two jobs this year (one from Jan-now that you no longer hold, and one from now-Dec), tell it the total income from the first job and total withholding (including your big check), and the anticipated income from the second job; it'll give you a suggestion about how to set up the new W-4. Probably will have you enter some amount on Step 3 as if you had a "tax credit."

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dragunight OP t1_j6n4eqs wrote

It's all direct deposit so I'm not quite sure, but In my company's payroll software, there are 2 paystubs. 1 for my bonus and 1 for my normal base salary.

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wijwijwij t1_j6n58u5 wrote

Sounds like they're calculating the withholding using the method (b) that is described in Publication 15 on withholding supplemental wages. I guess they can do that with separate checks as long as it's "paid concurrently."

>...Figure the income tax withholding as if the total of the regular wages and supplemental wages is a single payment. Subtract the tax already withheld or to be withheld from the regular wages. Withhold the remaining tax from the supplemental wages.

https://www.irs.gov/pub/irs-pdf/p15.pdf (page 19)

If you don't like the idea of overpaying so much during the year and waiting for refund, consider making an adjustment to W-4 that counters this across the year. It would be a Step 3 adjustment.

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dragunight OP t1_j6n6cnw wrote

My bank direct deposit was just 1 number. The Payroll software has them broken out as separate paystubs, but again I'm not really sure.

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_Nuba_ t1_j6n3b3t wrote

Bonuses are often taxed at a higher rate because the payment system calculates them as if you would make that amount every paycheck. You will get whatever amount you overpaid back in your tax refund.

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plowt-kirn t1_j6n5jtd wrote

> Bonuses are often taxed at a higher rate

"withheld," not taxed

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dragunight OP t1_j6n48y1 wrote

So I received 4 similar-sized bonuses last year all of which I thought I was paying more than I should be on the bonuses. So in theory I should have a pretty massive amount coming back to me in my tax return this year?

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wickedkittylitter t1_j6n3w7h wrote

It looks like your employer used the other method of calculating withholding on a bonus and that method is to withhold not as supplemental income, but as normal income when it comes to withholding. That means that taxes were withheld thinking $48k is a normal, routine pay amount. Overall, the method of withholding doesn't matter. Everything will even out when you file your taxes for 2023.

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dragunight OP t1_j6n4huh wrote

So if this happened on every one of my bonuses in 2022, I should have a pretty massive tax refund coming back to me this year?

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Boring-Cartographer2 t1_j6n59xp wrote

Directionally yes but there could be offsetting factors. For example if you made a lot of dividend or interest income then the taxes on those might wash out the refund you would get otherwise.

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dragunight OP t1_j6n67qy wrote

Unfortunately, I can assure you I have not :(

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Boring-Cartographer2 t1_j6n4lcx wrote

This, except I wouldn’t say it doesn’t matter, because OP is giving the government a free loan. They could try adjusting their withholding elections for the rest of the year to try to offset this.

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eckliptic t1_j6n5050 wrote

If you know the size of your future bonuses , you can change your regular monthly withholding via the calculator to factor that in

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dragunight OP t1_j6n6ioc wrote

They are variable. I've consistently overachieved and gotten large bonuses, but I wouldn't have an accurate way to forecast what they'd be throughout the year.

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eckliptic t1_j6n84t1 wrote

You can make adjustments to your W4 after each bonus based on your calculations from the bonuses you have received that year and projecting a very conservative number for the next one (or use zero).

Ideally you want to let the government borrow as little free money as possible

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ImpossibleJoke7456 t1_j6n94z2 wrote

The software probably assumes the bonus is your ongoing paycheck and places you in a higher tax bracket.

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