How can I avoid the 40% tax rate I pay on my quarterly bonuses ?

Question

I don't want add to my 401 K w/ this money and also this profit sharing bonus is directly based on my attendance.
Is there a different tax rate for bonuses if it is based to your performance at work?

Answer 1

Your employer is probably trying to do you a favor- thank them next time!. Most want to reward you with say a $1,000 bonus, but because of taxes, they don't want you to receive a check for $600 and feel jipped. That is why they typically gross up the bonus at a max rate- 40% is typical, to cover all the taxes for you. The end result is that you get the intended $1,000 cash bonus, with an extra benefit of maybe 10-15% extra in that it will decrease your tax liability on other income.

If this is a profit sharing bonus being tossed to your 401k, you are probably out of luck (though again, this is a good thing). Small corps often having profit sharing plans to max out the the 401k contributions to their own plans. Because of discrimination rules, the company can't only give to the higher ups. But for instance- I had a client who was able to have his company pay $60,000 into the 401k plans of himself, his wife, and his daughter (all who worked for his business) with another $40,000 going to his employees. While this seems generous, it giave him a net tax deduction of $100,000, saving him $40,000 in tax. When combined with th $60,000 kept within the family, he essentially broke even but was able to max out his 401k which has too many benefits to list.

Summary- take the bonus or profit sharing contribution, and be happy.

Answer 2

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RE:
How can I avoid the 40% tax rate I pay on my quarterly bonuses ?
I don't want add to my 401 K w/ this money and also this profit sharing bonus is directly based on my attendance.
Is there a different tax rate for bonuses if it is based to your performance at work?

Answer 3

You didn't mention federal or state taxes. Generally, federal estimated taxes are paid if you owe more than $1,000 and are paid in 4 equal installments due on 04/15, 06/15, 09/15 and 01/15 (last quarter is due the month of the next year). The states apply th same quarterly installment dates but the tax threshold is different for each state. You can call up your state's tax authority for the information, if your state has an income tax.

Answer 4

Sounds like your bonuses are considered supplemental wages by the IRS. There are two ways an employer may calculate tax withholding on supplemental wages:

1. Withhold a flat 25%.

2. Add the supplemental and regular wages for the
most recent payroll period this year. Figure
withholding as if the total was a single payment. Then subtract the tax already withheld from the regular wages. Withhold the remaining tax from the supplemental wages.

Method 2 often results in less tax withheld.

Unfortunately for you, it's up to your employer to decide which option to use when calculating the amount of federal tax to withhold. But it couldn't hurt to show your employer page 13 of IRS Circular E (http://www.irs.gov/pub/irs-pdf/p15.pdf) and ask your employer to use method 2. Good luck.

Answer 5

This is what people where I work do...If you can change your withholdings via computer, two weeks before you are scheduled to receive your check, change your withholding to exempt. After you get your check, change it back to what it was. (don't forget to change it back, or you will be in deep debt to the irs.) I have no clue as to whether this is legal, but you are going to pay those taxes when you file for your return. It will result in a much smaller tax return if your bonus is large. If you end up paying taxes every year, I wouldn't suggest this method.

Answer 6

Before you start trying clever ways to avoid taxes, try to take a different perspective. It doesn't really matter what tax percent gets applied to your earnings. When you file your income tax at the end of the year, you are going to end up "fair and square" with the government. You either get more back; or if you still owe, you owe less.

Answer 7

There is a higher rate withheld from bonus checks, but when you actually get your W-2 and file your return, it's taxed like your regular wages, so if too much is taken out (and it almost surely is) you'll get the excess back when you file.