• Accounting , Tips and Tricks ,
• 24 Sep

If you are here you probably receiving a bonus and heard that they tax your Bonus Pay at a higher rate.  Maybe you heard that it is somewhere and while you are excited about receiving some extra cash, the idea of paying higher taxes on it isn’t sitting well.

Let’s clear the air a bit about payroll taxes.

The amount withheld on your paycheck, and the amount of tax you actually pay are different.

If they were the same you’d never get a tax refund and you’d never owe additional come springtime. The amount of tax you pay is determined on your 1040. The amount withheld is just an estimate that you have to pay.

The withholding tax is an estimate of what you will owe at the year end.

Their is no way to accurately determine what that actual amount of taxes due will actually be. The IRS set’s up mandatory withholdings from your paycheck to make sure that the government gets paid first and on time so that it can meet funding obligations.

The amount of tax you pay is determined on your 1040 while the withholding amount is just an estimate that you have to pay.

So now let’s go back to the retro pay. Retroactive pay along with severance, awards, prizes, payments for non-deductible moving expenses, bonuses, etc. are considered “Supplemental Wages”.  This means they aren’t part of your typical wage for whatever reason.

The IRS gives employers a couple of options. First your employer calculates withholding tax to be a flat 25% rate.  Or there is a more complicated process where they basically take the supplemental amount and add it to your wages to determine the amount withheld.

Payroll is complicated enough so many go with the flat 25% rate.

This often means that when you get your check, it’s like, whoa, why did I pay so much in taxes? This is rediculous! Now you know so you can calm down a bit before marching down to HR or payroll because you think you’ve been cheated. You know withholding rates are different than what you actually pay in taxes. That happens on your 1040, not on your paycheck.

Even if your employer over withheld, you’ll get it back next spring.

If you want to learn more, check out IRS Publication 15.