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jgordosea
jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3007
Experience:  I've prepared all types of taxes since 1987.
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I am receiving a substantial bonus pay out from my employer.

Resolved Question:

I am receiving a substantial bonus pay out from my employer. How should I adjust my tax withholdings prior to receiving this payment?
Submitted: 1 year ago.
Category: Tax
Expert:  jgordosea replied 1 year ago.

Greetings,

 

Generally there is not a need to adjust your withholdings when a bonus is paid and usually there may not be an option as to how much is withheld.

 

Usually the employer has a choice of two methods to use to withhold:

1) Add the bonus amount to the usual paycheck and compute the withholding on the total amount based on the W-4 on file with the employer.

2) Withhold separately on the bonus at a rate of 25% without regard to the usual salary. For bonus amounts over one million the rate is 35%.

 

For more details see https://turbotax.intuit.com/tax-tools/tax-tips/General-Tax-Tips/What-is-the-Federal-Supplemental-Tax-Rate-/INF19305.html

 

For most taxpayers either method will be sufficient withholding and for most employers the employee has no choice as to how the employer chooses to withhold.

The employer has control over which method may be used.

 

If after the bonus is paid and you believe more tax needs to be paid in for the rest of the year you can decrease the allowances on your W-4 by submitting a new copy to the employer. See http://www.irs.gov/pub/irs-pdf/fw4.pdf for a copy of the 2013 form.

 

Please ask if you need more discussion or clarification.

Thank you.

 

 

Customer: replied 1 year ago.

Here is the information I received from my employer regarding how the bonus will be payed out.


 



  • The withholdings will be federal and state taxes - no 401-k, no insurance, no other withholdings.

  • There are special tax withholding rules for bonus payouts.

  • Depending on your personal tax situation you may owe tax substantially more than the withholding amount. I encourage you to consult your own tax adviser about your personal tax situation.


 


 


The part I am needing your input on is the last bullet point; what is meant by "you may owe tax substantially more than the withholding amount" mean?


 


Thanks!!

Expert:  jgordosea replied 1 year ago.

Hello again,

 

What that means is your actual tax rate may be more than the rate of withholding on the bonus so you will pay that amount of tax other than the withholding on the bonus.

 

The income tax rates this year go up to as much as 39.6% on the amount of taxable income over 400,000 (450,000 for married filing jointly).

 

For a schedule of rates see http://www.forbes.com/sites/kellyphillipserb/2013/01/15/irs-announces-2013-tax-rates-standard-deduction-amounts-and-more/

 

So, if my marginal tax rate will be more than 25% but only 25% is withheld then the additional amount will have to paid in either by withholding, estimated payment or with the tax return when filed.

For example, if the bonus would be taxed at 35% based on all my other income, deductions, exemptions, etc. then I will owe another 10% of the bonus at some point. If my bonus was 500,000 then I will owe another $5000 of tax.

 

Depending on which of the two methods that is chosen there may be a flat 25% or a percentage higher, or lower, based on my W-4 on file. Since there is no way to predict, you will have to wait to see how much is withheld and then project your total income, deductions, exemptions, etc for the year as well as future withholding to know if any additional amount is or is not needed to be paid.

 

Even if the withholding is not enough to pay all of the tax due now you can choose to pay the balance with your tax return when you file timely so long as the total withheld for this year, 2013, is more than the total tax you had in the prior year, 2012.

On the 2012 Form 1040 the total tax was on line 61.

 

You can compare your total withheld after the bonus plus projected to be withheld the rest of the year and if that is more than line 61 of your 2012 return there is no penalty to wait and pay when you file before April 15, 2014.

 

If you do want to pay in additional tax you can increase withholding on the rest of the year wages or send in an estimated payment.

 

For more on estimated payment see http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Estimated-Taxes

 

Not having as much as last year's tax withheld and not paying in any amount until you file can result in a penalty of about 3% per year of the underpaid amount.

For example, if my underpayment is 10,000 then the penalty is about $300 for income earned all year; but a computation can be used to annualize income and since the bonus was in the third quarter the penalty would only be about $150.

 

Please do ask if you need further discussion or clarification.

Thank you.

 

 

 

 

 

jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3007
Experience: I've prepared all types of taxes since 1987.
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