I am a single man living and working in New York City. For my normal paychecks, the total tax withheld is roughly 34%, including city, state, and Federal withholdings. I recently got a small bonus as part of my company's employee referral program and was taxed at a near 50% rate. Why do they insist on bilking me of a larger proportion of my bonus?
No one is bilking you. This is perfectly legit. Just know that if you're expecting a midyear bonus, year-end bonus or any other kind of supplementary income, at least 28% of it will be withheld for federal tax purposes. That's just the way it is.
Your question just gets to the heart of our "graduated" tax system. To figure out your tax bill, you can't just apply a flat rate to your gross wages. For instance, if your taxable income is $70,000 as a single guy, you fall in the 31% federal tax bracket. But you can't just multiply that amount by 31% and assume that's your tax bill. Because the rates are graduated, only a portion of your salary is taxed at 31%; the rest is taxed at lower levels. In the end, your tax bill actually will be lower than if you'd applied a flat rate.
But in most instances, your bonus is considered a "supplemental wage" and is not subject to the same rules. It gets hit with a flat federal rate of 28%. No tricky calculations there.
That's the minimum your employer must withhold on a bonus, says Clarence Kehoe, partner and director of employee benefits at
Anchin Block & Anchin
, a New York accounting firm. You may be able to request to have more withheld, but definitely not less.
I'll assume you're in the 28% federal income tax bracket. Then take out state tax, city tax, Social Security, Medicare, and hopefully a 401(k) contribution, and Uncle Sam ends up keeping close to 34%.
But, remember, because you're in the 28% bracket, you just can't slap 28% on your wages and assume you've calculated you federal tax bill.