Bonus To Me or the IRS?
Q. I just got a bonus from my company and noticed the taxes were way higher than my normal tax bracket. What is going on? I live in California.
A. I have good news and bad news for you. The bad news is, the calculation is probably correct. You did not supply any numbers with your question, but hopefully, the following example will help to clear some of this up.
Congratulations on your bonus. Many folks these days would love to be in your situation instead of standing in the unemployment line.
Your payroll department has two ways to calculate withholding on bonuses or supplemental payments as we say in the payroll industry. They can either calculate using a flat percentage or they can add the bonus to your previous check, calculate taxes on the total and subtract out the values from the last check. The latter method is called the aggregate method. What is left after subtracting is nothing more than the bonus and associated taxes. Because it is much more involved, most employers will choose not to use the aggregate method. Unfortunately, this is the more accurate method since it aligns with your regular pay to get closer to your actual tax liability. It is also a better method for higher income individuals whose marginal rate may be higher than the flat rate.
If your bonus is $500, most payroll departments will simply use the flat percentage method to get your withholding. If you have received less than $1million of bonuses for the year, the federal withholding percentage will be 25%. That means right off the top, you pay $125 in taxes. Social Security and Medicare remove another 7.65% or $38.25. In California, there are two percentages possible: 9.3% and 6%. Bonuses use the 9.3% rate which takes another $23.25. If you have not reached the limit on California SDI (State Disability Insurance) withholding for the year, this will be calculated at 1.1% for 2009 for another $5.50. This is a total withholding burden of 43.05%. You will take home $284.75 unless your employer grosses up the bonus and pays the taxes for you. Tax withholding on your regular wages may be lower for federal and state purposes which is why this seems so high.
The good news is that if this is actually too much withholding, you will get some of it back when you file your tax returns for federal and state purposes. But until then, check with your tax planner or CPA, you may be able to adjust your W-4 to have less withholding on your regular wages and reduce the size of your eventual refund. If you always end up owing extra when you file your tax return, this is a great time to catch up.
