Let's assume your annual taxable income is $40,000. As a single guy, the first $26,250 is subject to the 15% federal income tax rate, according to the tax code. That's $3,938. The $13,750 remainder "graduates" to the 28% rate, or $3,850. Your total tax then is $7,788 (3,850 + 3,938). Using ballpark figures, if you get paid twice a month, around $324 should be withheld from your check each week for federal tax.
But if you just took a flat 28% of $40,000, you'd get $11,200 in taxes, much more than the graduated amount.
That's why your bonus check has more money withheld for taxes. It just gets hit with the flat 28%. "Pull out state, city, Social Security, Medicare and 401(k) and that's why it seems like 50% of your bonus disappears," says Jim Seidel, managing editor at
, an information provider to tax professionals. Note: 401(k) contributions typically are taken out of bonuses.
Blame It on Your Boss
Your employer actually can choose how to withhold on your bonus. Obviously, slapping a 28% rate on it is the simplest, so most opt for the easy way out.
But your employer also can elect to add your bonus to that period's wages and then figure out how much to withhold on that larger amount, says Kehoe; accountants call this the annualized method.
If you make $2,500 a month but get a $5,000 midyear bonus, your withholding will be computed as if you received a single wage payment of $7,500 for the monthly payroll period. Then that $7,500 is annualized, or assumed to be part of your yearly salary. So if you earned $7,500 a month, you'd be making $90,000 annually versus $30,000. But at $90,000, your tax rate jumps to the 31% tax bracket vs. the 28%.
Under this annualized method, you would end up taking home even less of your bonus because you'd be withheld at much higher rates.
If It Walks Like a Duck
It doesn't matter whether your salary is $90,000 and you get a $200,000 bonus or your salary is $290,000, says Kent Noard, a partner at
Sterling Wood Financial
, in San Jose, Calif. Either way, you owe Uncle Sam tax on $290,000 at the end of the year.
So if you've received a bonus, be sure to analyze your current tax situation. Drop your annual wage and bonus numbers into
or some other tax preparation software and determine your withholding situation.