My Bonus...Isn't?
Posted on June 17, 2006 by Her and tagged employment
Yesterday at work I got a performance bonus, except it wasn't a bonus. Huh?
Usually when my company gives a bonus, they hand out a paper check and the stub is clearly marked "bonus". It is also taxed at the high bonus rate, so I take home just over half my bonus. But yesterday's bonus was equal to one paycheck, and it was treated exactly like a regular paycheck. It was direct deposited first thing in the morning, and the pay stub says I worked 80 regular hours. They took out regular taxes rather than the high bonus taxes. My company is calling this a "salary adjustment based on performance" rather than a bonus.
Anybody ever have this happen to them? It seems very odd.
Comments/Trackbacks
Trackback URL: http://www.makelovenotdebt.com/MT/mlnd-trackbacks.cgi/940
I just got a bonus at work. I also had one in October. Both were added to my regular paycheck and taxed like my regular salary. I imagine they tax bonuses higher since they figure that extra money pushes you further into a higher tax bracket, so it'll get taxed at 25% or something like that. For me, I could get a bonus equal to triple my salary, pushing me into one of the highest tax brackets, and it'd only be taxed at my regular rate.
Very strange indeed. The part about paying 80 hours is especially puzzling if the company has a retirement contribution partially based on hours. Companies generally do not record hours with bonus pay. The part about taxing at your normal rate is also strange because the government generally requires that your employer take out taxes on bonuses at the supplemental rate.
A bonus? What's that? Oh right that's the thing they don't give me b/c I'm eligible for overtime that I'm not allowed to take. Bitter... table for one...
I think someone messed up. It is standard to tax bonus' at a higher rate - do to the increase of your pay. So Federally they should have charged 28%, Fica 7.65% and what ever your state max is (for example Illinois is 3%, but tax may be on a weekly basis 2.6% to account for exemptions - so a bonus would be calculated at 3%).
The big red flag for me is that you said they recorded it as 80 hours. Business wise this is a bad decision. One example of why it is bad is a thing called Workers Comp Insurance. When you have an employee you must pay a percentage per regular pay. So it is important for companies to actually pick out the "extras" to keep insurance cost down. Extras such as overtime & bonus'.
But unless you have been bumped into an entirely different tax bracket, this will not affect you so much. It is costing and affecting the business. So don't worry. Unless you are worried that the business is being mismanaged and could be setting itself up to fail, then maybe you should ask questions of your human resources or manager (although the manager probably is not in the know).
Good Luck
I've had this happen before. It's the way for the employer to be nice. I'm salaried but I also earn OT. It comes out as straight time and not classified as a 'bonus' so I earn more.
Actually, the "bonus rate" is just your marginal tax rate. Your normal salary is taxed at a rate that takes into account your estimated exemptions (via your W-4 form). But since that's already taken into account, "extra" money like bonus is just taxed at the marginal rate.
I'm not really sure why they do that, since it all equals out when you file your tax returns. :)
Most importantly, congrats on the bon... err... salary adjustment based on performance!!
Sorry for the late comment, but I'm behind on my blog reading!
Anyway, Jonathan is right on here. Contrary to popular belief, bonuses are not taxed at a higher rate than your salary. They are taxed at your normal rate. It just seems like they are taxed higher because if your paycheck is higher, the accounting software will assume that is how much you make usually per pay period, and pick a witholding that is appropriate if you made that all year.
Also, another common misconception about this situation is that people think you can be pushed into a higher tax bracket just barely, resulting in keeping less money than had you not gotten a bonus. Taxes don't work that way.
The taxes are in ranges. So you don't pay 28% on all your income. I don't have the exact ranges and percentages on me, but I know the 25% bracket is around 70k for a single person. So if you are making 100k, only the portion of the money Above the 25% bracket is taxed at 28%. That's why when you get your taxes prepared professionally, you'll have an "effective tax rate" field.
Not really related to bonus, but related to taxes - ok, and maybe not relevant to you but should hopefully make you feel better. Because of the country I live in, and the tax bracket I'm in (by the way my salary is about US $45,000) I currently pay an income tax rate of 39%. No, that's not a mis-print, it's actually 39%!!! Ok, we get public education, public health, and a lot of tree-hugging types running the country - but 39%? How am supposed to get out of debt with this much tax to pay? Argghh!
Average Joe | Jun 17, 2006
Interesting way of doing it. I've never heard of it either. My company gives my bonus as a heavily taxed bonus check. The amount taken out in taxes alone on mine is equal to one check. I suppose it's better than nothing though.
Curious, did they take out any health/dental deductions, 401k, or anything else? When I get mine they only take out 401k, nothing else aside from the taxes.
Reply to this comment