Can someone please tell me why the government takes 40% of my end of year bonus in taxes?

Question

If you say its because I get put into a higher tax bracket, then why is it when I get a smaller bonus..say $300 it gets taxed the exact same way-40%

Answer 1

I am not sure why they do, but just because they withhold the taxes doesn't mean that is what you owe. File your taxes early and see if you're entitled to a refund. Maybe adjust your withholding exemptions if you are always getting refunds.

Thanks,
Dana (counseling masters' student)

Answer 2

Not sure why they'd take 40% - the usual withholding for federal income tax is 25%. Is that the whole withholding or just the federal income tax part? You'll also pay 7.65% of the bonus for social security, plus whatever state and local taxes there are where you live, so that could all add up to 40%.

If you are in a lower bracket than 25%, you'll get any extra withholding back as a refund when you file your taxes.

Answer 3

Because that paycheck makes you look "Rich".

Imagine getting taxed like that on every paycheck.

There are two methods to determine bonus withholding. One method is called the Percentage Method; the other is the Aggregate Method. Which method is used to tax your bonus is determined at the state level.

The Percentage Method is not very favorable to the average taxpayer. A flat tax of 25% at the federal level, and a flat state percentage (I know it happens to be 9.3% in California), will be withheld from your bonus. It doesn’t matter if you are in a low tax bracket or if you usually get to keep 90% of your check. This is a flat tax, regardless of your tax bracket. Your only recourse in this situation is if you have a guaranteed bonus coming your way, you can increase your withholding allowances during the year. This means your regular paychecks will have less income tax withheld, to offset the high tax withholding on your bonus. Another alternative is to wait until you get your bonus, and then increase your withholding allowances, so that less tax is withheld the rest of the year. These are difficult strategies to implement though, since most bonuses come at year-end, and you do not want to risk under-withholding for a bonus that might never appear.

The Aggregate Method can be a little bit better for your bottom line. In many states, the aggregate method is allowed, which means the tax withheld on your bonus check is based on your wages and tax withholding to-date. This basically means it will be calculated like any regular paycheck. Regardless, this method will still take a big bite out of your bonus. The reason is that often payroll software does not recognize that a bonus is a one-time payment. So the payroll software might assume that your $1,000 bonus check is really a recurring amount that will push up your annual income much higher. For the one bonus, it may assume it needs to withhold a lot more, because the software suddenly thinks you are in a much higher tax bracket and that you need to be taxed at a higher rate. For smaller bonuses, many employers don’t even realize there is a "method" so faulty software calculation is probably the biggest bonus problem for most of us.

Even if your employer figures out your bonus correctly, the fact is, a bonus is usually a large amount compared to your regular paycheck. Let’s face it; a bigger check is going to need more taxes withheld. The taxes are simply magnified. All of these factors lead to you getting a smaller bonus check than you expected.

But there is another problem when it comes to bonuses. If you are in a high tax bracket, and your company uses the percentage method, you may find that you are under-withheld at the end of the year. Maybe your federal tax rate is 35%, but your company only withheld 25%. In this case, if you are concerned about under-withholding, simply ask your employer to withhold more taxes from your bonus checks. Your employer can honor your request to withhold more. They just can’t honor a request to withhold less on a bonus.

If you are expecting a bonus and want to figure out how much you can expect to keep, check out the bonus calculators at paycheckcity.com . This is a great tool to help you get a handle on your paychecks. You can see how claiming different numbers of allowances and how varying scenarios will affect your withholding. The website has both regular paycheck calculators and bonus calculators. Make sure to select your state to get accurate results from these calculators.

Answer 4

Maybe your bonus ups your tax bracket.

Answer 5

The other posters are correct. A bonus appears as though you made all that money in one pay period. Relax. It's near the end of the year, and if this causes you to get a large refund, it's not long to wait for it to return to you.

Answer 6

Because it'll put you in a higher tax bracket.

Answer 7

Because they can.

Actually, they treat that amount as if you got paid that much in every paycheck, so it outs you in a higher bracket. If they took more than they should, you 'll get it back when you file.

Now you know how it feels to those of us that get that much taken out every time.

Answer 8

It's taxable income and it's taxed at the rate of the bracket it falls into.

Answer 9

Bonus is ordinary income so it will be taxed at whatever tax bracket you are in. It is earned income so you will also pay FICA, SDI, etc.

Answer 10

bonus is considered income, hence you must pay federal and state income tax on that bonus