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flat rate supplemental wage withholding Post Review

NEW 2018 FEDERAL WITHHOLDING TABLES MUST BE USED BEGINNING TODAY! This is also the deadline for changing the optional flat rate for withholding on supplemental wage payments of $1 million or less from 25% to 22%. IRS Publication 15:

flat rate supplemental wage withholding Q&A Review

Do I have to withhold taxes from bonus checks?

I'm not going to try to figure out why the question is dated 2017 and the responses are dated 2015 and 2016. I assume that Quora merged questions, but it resulted in incorrect answers. Anyway, yes, you legally have to withhold tax from bonuses. You refer to "supplementary wage tax", by which I assume you mean the flat-rate withholding method (currently 22%) that is often used; THAT is not legally required -- it is optional (unless the employee receives more than $1,000,000 in supplementary wages for the year), and you have to meet certain conditions in order to even be able to use it. Basically, a bonus is simply treated as wages, and in included (for withholding purposes) as part of the paycheck with which, or nearest to which, it is paid. That makes withholding easy, but it has an unfortunate side effect -- by increasing the paycheck's gross by the amount of the bonus, the withholding formulas base your withholding on an annual gross that assumes you receive that same amount EVERY PAYCHECK (which you obviously do not). For example, suppose you earn $52000, payable $2000 every two weeks. Your $2000 checks have withholding deducted that it based on your $52000 annual income. But assume that you also receive a $20,000 bonus with your first paycheck in March. Your gross in that paycheck is now $22,000, and your withholding will be based on an annual income of $572,000 (which will substantially increase the rate at which your withholding is calculated). The optional alternative that is available for some payments of "supplemental wages" (like bonuses) is to withhold a flat 22% of the gross bonus amount. In order to use this option, the bonus must be paid separately from a regular paycheck, and the employer must have withheld tax from your wages in the preceding year, and must be withholding tax from your wages in the current year. That flat 22% will usually be lower than the amount that results from the method described above, but higher than what you are used to seeing in your "normal" paychecks. (If supplemental wages for the year are more than $1,000,000, then a flat 37% is required to be withheld on the excess over $1,000,000 -- it is not optional.) Then, of course, there's FICA, which applies to a bonus the same way it applies to any other wages. You cannot get around withholding -- as one of the responses claimed -- by giving under $25. A bonus of $1 is taxable and subject to withholding. What the previous responder is thinking of is the rule that excludes from income gifts of property having a value under $25. Cash, or anything the equivalent of cash (gift certificates, gift cards, debit cards, etc.) are not "property." A $20 turkey is. (A $40 turkey is also property, but it's over $25, so it's taxable wages.) A responder said "It's ok to skip federal withholding if the bonus is sufficiently small." That's bullshit. He may have meant that you won't get caught if it's small enough, but that's very different from it being "ok to skip withholding". In fact, since you're liable for that tax that you don't withhold, you have to remember that someone's bonus may be "small", but many employees with "small" bonuses can add up to an amount that's not so small. Another responder said that you have to withhold FICA (true) but kind of wrote off the income tax by saying "The IRS says one needs to withhold 25% for supplemental wages but not everyone follows it." As already noted, the flat-rate (formerly 25%, now 22%) is an optional alternative (at least up to $1,000,000), and it's true that "not everyone follows it", but not in the way meant by the responder. First, not everyone is even eligible to "follow it." And those that are may or may not choose to do so.

Equity: How does tax on RSU work?

Do you get taxed twice on RSUs? A common misconception is being taxed twice on RSUs which is simply not true. Instead, a better way of understanding the taxation of RSUs is by breaking it down into 2 separate events: The first tax event is on the RSU vesting date when the scheduled unvested shares amount becomes vested. Not to be confused with RSU grant date which is not taxed. The RSU vested amount is added to your W2 Form and taxed as ordinary income calculated from the stock price on the vesting date. The second tax event is on the date you decide when to sell the RSUs that have vested from the first tax event. If the RSU vested shares are sold at a stock price greater than from the vesting date stock price, then you have capital gains. RSU capital gains are subject to be taxed at either Short-Term Capital Gains or Long-Term Capital Gains. First RSU tax event For each vesting date, it is mandatory to pay the first tax event immediately as part of your compensation income. The amount of income is determined by the number of RSU vested shares multiplied by the stock price on that date. For U.S. employees, the RSU income will appear on the W-2 Form. RSU income is subject to the mandatory supplemental wage withholding taxes that include: Federal income tax at the flat supplemental wage rate (22% in 2019) Social Security (up to the yearly maximum) and Medicare State and local taxes (where applicable) Second RSU tax event The second tax event is on the date you decide when to sell the RSUs that have vested from the first tax event. If the RSU vested shares are sold at a stock price greater than from the vesting date stock price, then you have capital gains. These capital gains are subject to be taxed at either Short-Term Capital Gains or Long-Term Capital Gains. Short-Term Capital Gains, are paid for any RSUs that are sold where the RSUs are held for less than 1-year after the vesting date. Short-Term Capital Gains are subject to the tax brackets set forth for ordinary income. Long-Term Capital Gains, are paid for any RSUs that are sold where the RSUs are held for greater than 1-year after the vesting date. Long-Term Capital Gains are subject to 15% tax if your income is between $39,376 to $434,550 (filing Single) or $78,751 to $488,850 (filing Jointly Married)Single filers who make less than $39,376 pay 0% Long-Term Capital Gains tax.Jointly Married filers who less than $78,751 pay 0% Long-Term Capital Gains tax. To better help explain the tax differences, I created the following chart which combines the Taxable Income amounts from the 2019 tax bracket with the Long-Term Capital Gain amounts. (Source: IRS). I hope this answer helps. You can read more about RSUs on my blog post. Regards, Charlie Evans, ,RenttheMortgage.com Are RSUs taxed twice? - Rent the Mortgage

Do I pay more tax on a bonus or just higher withholding?

In the U.S., bonuses (or supplemental wage payments) are withheld at a flat rate that is generally higher than the normal withholding rate. It is just a withholding, not an assessment of tax. You may be able to request of your employer to withhold a different amount if you have the ability to determine what your tax should be on your bonus (this is a service I regularly provide to my clients, in which I calculate the tax applicable to their situation and advise them how much to request be withheld on the bonus). I have seen cases where the flat-rate withholding is insufficient to cover the actual tax attributable to the bonus — so it is advisable not to just assume that the withholding is sufficient to cover your tax (especially if you are a higher wage earner). The tax is ultimately determined on your tax return. It is possible that the bonus could increase your income into the next tax bracket; so theoretically some of this income could end up being taxed at a higher rate when all the dust settles at the end of the year. (Note that when you go up a tax bracket, only the amount of income that is in that bracket is taxed at the higher rate — it does not mean that all of your income is taxed at the higher rate.) If your bonus is substantial, you should contact your tax adviser so he/she can determine if planning is advisable in your situation to avoid a potential surprise when you file your tax return later on.

Why are bonuses taxed at 40% in the USA? Why not pro-rate the tax based on the amount earned?

You're not talking about your tax rate — you're talking about withholding. Two different things. The withholding on your bonus may, in fact, be higher than the withholding on your regular salary. That wouldn't be uncommon. Withholding on salary payments is calculated on the assumption that you are receiving the same paycheck every pay period, and also taking into account exemptions that you claim by filing your W-4. The tax withheld is ,supposed, ,to, approximate the tax that you will actually owe on your tax return (but since it only takes tour salary into account, it usually is not very accurate). The usual way to calculate withholding on a bonus (or other wages that are not part of a regular paycheck — called “supplemental wages”) is to withhold a flat 25%, with no allowance for exemptions, or 39.6% if it's over $1 million. (If the withholding were done on the “regular” basis, it would likely be more, because it would assume that the bonus amount is received ,every, paycheck, which would mean that your income would be assumed to be ,much, higher.) In addition to the 25% federal income tax, the employer will withhold FICA taxes, state income taxes and whatever other deductions apply (one reply mentioned 401(k) contributions). So, when you compare the net bonus check to s single net paycheck, it will often look as if the taxes are higher. Buy when you do your tax return, it's all part of your gross income.

How do sign on bonuses get taxed. I've heard from some resources it's a flat rate and other resources it's just a part of income?

In the US, they’re taxed as ordinary income but are considered supplemental wages with different withholding rules that rarely match the tax liability. Companies can lump them in with regular wages and calculate withholding as if you earned that much always, producing over withholding. Companies usually withhold at the flat rate of 22% for the first $1M in supplemental wages, and the highest rate (37%) beyond that. This can be high or low depending on your tax bracket. 6.2% FICA is withheld up to the wage cap for that employer ($132,900 for 2019), 1.45% Medicare on all of it, and the 0.9% Medicare surcharge beyond $200K. States also have supplemental wage withholding rates which may not match your eventual tax bill. California takes 10.23% which is high for single filers earning under $286K and married joint payers $573K.

An employee was taxed 50% on his severance on Gusto, when it should have been closer to 20 - 25%. Why is this, and how can it be fixed?

In the USA, severance payments are usually subject to supplemental wages withholding tax rates. The rate is usually a flat 25% for the entire severance payment. If the payroll processor did not code the severance payment as supplemental wages in the payroll software, then the payroll software may have simply withheld taxes using the ordinary wages rates, which could be much higher than 25%. Perhaps the payroll processor could void the payment and redo it. Alternatively, the reason the employee was taxes 50% is because the 50% includes federal tax withholding, social security tax, medicare tax, state withholding tax, and local withholding tax. All of these together could possibly approach 50%, depending on the jurisdictions involved.

What is the tax rate for a signing bonus? It seems I was taxed ~50%?

The IRS has rules for withholding on "supplemental wages" - which includes bonus payments - that differ from their withholding rules on regular wages. Assuming that your bonus was less than $1 million, the employer has a choice of withholding a flat 25%, or combining the bonus with the regular wages, computing the withholding as though that were a single payment, subtracting out what would have been withheld from the regular wages, and withholding the remaining amount from the bonus payment. The method chosen depends on the employer's payroll system but will typically be higher than your normal withholding rate. The employer will also withhold Social Security and Medicare (combined rate of 7.65%) and state taxes, which is probably what pushed the total withholding close to 50%. It's also very likely that you will get a significant chunk of that back when you file your 2013 tax return. See Section 7 of ,IRS Publication 15, for a description of how supplemental wages are handled.

Why is signing bonus taxed higher than base salary? What percentage of it could you get it back from tax return?

It's not. All wages are ordinary income taxed according to what your taxable income is. What you're talking about is the withholding — not the actual tax. Most (but not all ) of the time, bonuses can be treated as "supplemental wages" and be subject to a flat 22% withholding rate. That may be higher or may be lower than the withholding rate on your base salary — there's no particular relationship between the two — but it will always be less than the alternative, which is to just include the bonus amount in your paycheck and withhold based on the gross amount. The amount that you get back —if anything — when you file your tax return depends on what your actual tax liability is and how much tax was withheld for the year.

Why is the tax on bonuses so high?

Both of the previous answers are correct, if that is the way that your employer calculates its withholding on bonuses (as if it were a "regular" payroll). Most of the time, however, bonuses are treated as "supplemental" wages, and are subject to Federal income tax withholding at a flat rate of 22% of the gross payment (for this year -- it was 25% prior to this year). Unless your regular paychecks are very high, that's going to be more withholding than you're used to seeing, but, as was already said, if it's more than you owe, you'll get it back. States that have income tax have their own rules -- some also have flat rates for bonuses, others don't. FICA taxes are the same as any other paycheck.

Why do bonuses have more taxes withheld than regular paychecks?

Two reasons, because there are two ways to withhold tax on “supplemental wages”, such as bonuses (U.S.). The bonus can be added to a regular paycheck (for purposes of withholding calculations — it doesn't actually have to be included in the same check). If your employer does that, then the withholding on that check is calculated as if the amount (including the bonus) were the amount that you get every week, or two weeks, or whatever. So suppose you earn $52,000 ($2,000 every two weeks). And suppose that you receive a bonus of $20,000 in December. That will be combined with one of your pay checks, and instead of a $2000 paycheck, you will have a $22,000 paycheck, from which the withholding will be calculated as if you earned $22,000 every two weeks — or $572,000/yr, not just the $72,000 that you're actually earning ($52,000 + $20,000 bonus). So the withholding will be much higher than it actually ought to be. Alternatively, your employer may qualify to be able to use "flat-rate” withholding (so long as the employer has correctly withheld from wages in the current and preceding years). If so, the gross bonus amount (with no allowances or exemptions) is subject to a flat 21% withholding (39% if over $1,000,000). In either of those cases, the withholding on the bonus will almost certainly be more than the “regular” withholding on your paychecks.