Excessively taxing a bonus?

April 14, 2008 5:43 PM

So a friend's just received a bonus from her employer, but the bonuses seem excessive. (The taxes from that bonus exceed the total of taxes that were paid for the entire year.) Is there anything that can be done?

Yes, life is dangerously close to the poverty line (yay acting!), but we knew this nice little bonus was coming in. However, we didn't expect that our 2000 bonus to be mostly gobbled up by about ~$500USD in taxes and another $125 to Social Security.

Isn't there a way we can have the employer re-issue the check as a one time gift or donation or something? I mean, it's a bonus and the taxes from that bonus exceeded the taxes that we paid for the entire year. (We got the bonus for staying with her job to train her replacements - so yes, on top of all that, unemployment.)

Logically, it would have made more sense to break up the bonus as 4 "regular" paychecks, right? Then the taxes taken out would have been less, and the employee would receive more money, and really feel appreciated, right?

Gah. Apologies for the venting and incoherent rambling. I am extremely frustrated at this situation.

posted by leo. to work & money (14 comments total)

no
posted by Salvatorparadise at 5:45 PM on April 14

The upside is that you'll get a nice refund next spring. They tax bonuses as if you get paid your salary, plus the bonus, for every check. I've been told this is done in case the bonus puts you in the next tax bracket, so you don't have a big surprise when you file.

I guess if you really wanted to, you could figure in advance how much refund you're getting, and adjust your withholdings on your w-4 so that you pay less per check to even it out. But then you run the risk of overdoing it and owing money.
posted by hwyengr at 5:49 PM on April 14

It's not being excessively taxed, it's being excessively withheld in this particular situation. It's tax law for employers to withold at the 25% rate regardless of your marginal or average income tax rate. Your suggestions for having the employer "re-issue" the bonus are just ways to commit tax fraud. When you file your taxes, you will get the excess tax back in the form of a refund. There isn't any mechanism that I know of to get your refund from the IRS early.
posted by 0xFCAF at 5:49 PM on April 14

The U.S. tax system is progressive. As you earn more, you pay more. But 25 percent is a level that a single person only pays after $31,850 in taxable income. So it seems that too much tax might have been withheld this time. You should be able to get it back in your tax return.

Isn't there a way we can have the employer re-issue the check as a one time gift or donation or something?

If your friend wants to receive another bonus, I don't advise suggesting tax fraud.
posted by grouse at 5:50 PM on April 14

No, that's how bonuses are taxed. I expect to receive about 50% of any bonus I get, so then when I actually receive a whopping 60%, it's a pleasant surprise. You can't ask your employer to reissue it and tax it another way, because they're just following tax laws. It sucks, but the people who are saying "you'll get it back in your taxes" are right. Try to look at it from another perspective -- the $1400 or so you have is $1400 more than you would have had if you didn't get a bonus. Appreciate what you do have and try to use it wisely.
posted by boomchicka at 5:57 PM on April 14

If you believe that there will be excess withholding for your tax obligation due in April 2009, why can't you adjust your deductions on your W4 form? (I am not sure if this makes a big difference for very low levels of income where you aren't paying that much tax to begin with...)
posted by QuantumMeruit at 6:21 PM on April 14

I would strongly advise against modifying your W4 deductions unless you absolutely know what you are doing with regard to taxes (and no offense, since you had to ask this question, you don't). If you think having your bonus be smaller than you expected is bad, imagine how an unexpected 4-digit tax bill in April would feel.
posted by 0xFCAF at 6:27 PM on April 14

Oh dear god I didnt want tax fraud. Not at all. Damn shawshank redemption and me remembering that line from the rooftop. Thanks all for your input.
posted by leo. at 6:34 PM on April 14

About 20% of my pay is in the form of a bonus. This always just makes me want to cry but it does tend to result in a nice tax refund when combined with mortgage interest and other deductions.
posted by Octoparrot at 7:10 PM on April 14

Related, previously.
posted by misterbrandt at 7:51 PM on April 14

Modifying your W4 deductions isn't rocket science. Figure out in general what your gross income will be for 2008, and change your deductions on the W4 form to make sure what they take out will cover what you owe. I believe there's a worksheet. When I adjust mine, I just fill out a 1040 with my expected numbers and make it work. You aren't engaging in fraud if the amount withheld is equal to what you'll owe.
posted by gjc at 8:20 PM on April 14

What gtc said worked for me. I was one of those guys who filled out the defaults for the W-4 not knowing I could legally withhold less. After years of tax refunds, I followed the worksheet, adjusted the W-4 accordingly, and suddenly, instead of overpaying the IRS several thousand a year (and getting an interest-free refund), I was instead paying them the correct amount and having that several thousand accruing interest to me and, more importantly, available to keep me liquid in case there was an unexpected need for money.
posted by zippy at 8:42 PM on April 14

Is there anything that can be done?

Sure there is! Tell your employer that you don't want a bonus, then you won't have to pay any taxes on it.

I bet you like the idea of getting it back on the refund better. If you are sure you will be getting a refund, you can change your withholding for the rest of the year.
posted by yohko at 9:19 PM on April 14

Just think of the tax refund as a second bonus!
posted by miss tea at 4:32 AM on April 15