Why is work bonus separate from the paycheck?
May 19, 2007 10:10 AM   Subscribe

My employer gives out bonuses as separate checks, which are taxed separately. Why?

Any type of bonus is always issued as a separate check, with the usual taxes taken out.

What's the reason a place of busines would do this? Why is it not included in the regular paycheck?
posted by The Behatted Wild Man of Greenfield to Work & Money (13 answers total)
It is always taxed as your regular earnings, but it has been in my experience, easier on the accounting and HR departments to issue a separate check. I don't see a reason why accounting software couldn't better deal with it, but for hourly employees or employees that bill clients, it will probably just be more of a hassle to include it as a regular direct deposit or regular check.
posted by geoff. at 10:24 AM on May 19, 2007

Two reasons.

First, bonuses are supposed to be taxed at a set rate of 25%, rather than the varying rates people are subjected to based on yearly income.

Second, if the bonus is added to your gross pay for the week, it may push you up into a higher tax bracket than you would normally be in. Let's say you make $500 a week, or $25,000 a year, you're in a 15% bracket. Suddenly, you have a week where you make $1000. The calculations will think you make $52000 a year and put you in a 25% tax bracket. So even though the tax taken out of the bonus is high, it would be much higher if they were combined on one check.
posted by saffry at 10:30 AM on May 19, 2007 [2 favorites]

Saffry has it. And why not. I'd take a bonus in any way that I could get it. Frankly it makes it easier to recall the bonus amount.
posted by JayRwv at 10:54 AM on May 19, 2007

Bonus checks may (or may not) be withheld on at 25%, but they're taxed like any other compensation income.

Depending on your marginal tax rate, this may result in over- or under-withholding, resulting in a refund or liability when you file your taxes.
posted by Mr. President Dr. Steve Elvis America at 12:15 PM on May 19, 2007 [1 favorite]

Where I work they do it so as not to inflate your regular paycheck and thus kick in higher withholdings. Sometimes they'll even split the bonus over two checks.
posted by Gungho at 12:45 PM on May 19, 2007

There's a psychological aspect too. The message of "My boss handed me a $2500 check" is a lot stronger than "My auto-deposited paycheck is $2500 higher this week".
posted by mendel at 12:55 PM on May 19, 2007

I wish my bonus was taxed at 25%. God what a glorious day that would be.
posted by spicynuts at 6:51 AM on May 20, 2007

Sorry, saffry doesn't even remotely have it, at least with regards to tax brackets. OP doesn't say where he is but saf is in the US, where we are taxed on income on a sliding scale. The first X dollars you earn in the tax year are taxed at a lower percentage than X+1 to X+N.

It's irrelevant whether you were paid those dollars in one check on Dec 31st of the year, 12 checks over 12 months or by someone handing you $1 in cast every other minute. Income is income is income, at least as far as the IRS is concerned.

The big reason bonus checks are minted separately is psychological. If the amount was just lumped into the paycheck it wouldn't feel like A Special Event. An article in today's Post talks about how people mentally categorize their money and uses an example of people gambling away a bonus more lightly than they would regular income.

But the flip side of that behavior demonstrates that people view that money with a different emotional view, which is what the employer wants - a bonus is supposed to be special. Keeping it in a different check, or even a separate stub and all of it direct deposited, sends that message.
posted by phearlez at 8:35 AM on May 20, 2007 [1 favorite]

Sorry Phearlez, ADP agrees with me and I think they probably know a little about paychecks.

In addition, there are some complicated rules about how Cafe 125 deductions (health insurance, 401k etc.) should be handled on bonus paychecks. Some need to be canceled, so that employees don't overpay for their insurance, but I think 401k was one that HAD to be taken out. Although employees could get around that by canceling all their 401k deductions for a few weeks until after the bonus had been paid. Either way, it led to a lot of special rules for the bonus check that were easier to follow if it was done as a totally different payrun.

And I have to ask, was it the bonus check that you were expecting to be direct deposited?
posted by saffry at 12:27 PM on May 20, 2007

Saffry, that passage said what Pharlez said, not what you said. Read closer.
posted by Ironmouth at 3:00 PM on May 20, 2007

ADP agrees with me

Not even a little. You actually said:

it may push you up into a higher tax bracket than you would normally be in

You are confusing withholding with taxation. What you link is accurate. What you said was not.

While people often think of that deduction from their check as paid tax, it is not. You do not actually pay tax at the federal level until you file your taxes even though you may have made automatic estimated pre-payment over the full amount.

The government does a pretty good job at making this confusing because they're thrilled with people making interest-free loans to them every year. Calling what many people receive (and are tragically thrilled to get!) a "tax refund" is probably the biggest contributing factor. NOBODY gets a tax refund. People who have not adjusted their withholding correctly get refunded their tax overpayment when they file their return.

Personally I doubt there's a requirement with regards to the 401k contribution one way or another, however you can probably find such information on the Department of Labor website - they oversee matters such as timely contributions to 401k accounts.
posted by phearlez at 9:51 AM on May 21, 2007

phearlez -- NOBODY gets a tax refund.

That's false.
When the EIC exceeds the amount of taxes owed, it results in a tax refund to those who claim and qualify for the credit. [...] Any EIC that is more than your tax liability is refunded to you, but only if you file a tax return. (emphasis not added)
Earned Income Tax Credit (EIC)
posted by NortonDC at 11:56 AM on May 21, 2007

I plead guilty of hyperbole and throw myself on the mercy of the court. However I maintain that 99.9% of the time when people say "tax refund" they really mean the refunding of their overpayment, not an actual credit like the EIC.
posted by phearlez at 3:28 PM on May 21, 2007

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