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Tax on bonus (CA)

Tax on bonus (CA)

Old Feb 27th 2011, 6:49 pm
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Default Tax on bonus (CA)

Hi all,

Trying to find an answer to this, pardon me relatively new to the States.

So a colleague of mine informs me that our org deducts 43% tax on bonuses. My question is - is that a special tax rate for bonuses or it's just that it's withheld tax and then at end of the year it gets adjusted?

I read on IRS webpages that the flat rate for bonuses (federal) is 25% and for CA state taxes is ~10%. I don;t know why this does not = 43%.

Any information appreciated. My conclusion was may it be 43% or 25+10%, those are just withheld. At the end of the day it's added to W-2 and one gets taxed, when they filed taxes, according to the tax brackets.

Thank you.
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Old Feb 27th 2011, 6:52 pm
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Default Re: Tax on bonus (CA)

I think this is the 43%

Federal Income Tax: 25%
CA Income Tax: 10%
CA SDI: 1.1%
FICA: 7.65%
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Old Feb 27th 2011, 7:01 pm
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Default Re: Tax on bonus (CA)

Originally Posted by E3only View Post
I think this is the 43%

Federal Income Tax: 25%
CA Income Tax: 10%
CA SDI: 1.1%
FICA: 7.65%
In other words, yes, it is just normal withholding.

Bonuses are just another part of your income and get taxed in exactly the same way - they will just show up in the total income on your W2 and depending on your overall tax circumstances you may or may not end up getting a refund.

Note, also, that in some cases 401K contributions will be withheld from bonuses as well - my company always reminds people a few weeks before bonuses are paid out that they can, if the wish, adjust their contribution rate (possibly to as low as 0%) before the bonus is paid out and then increase it again afterwards. Personally I never bother doing that and just set my contribution level at the start of the year so that I will max out after about 10 months based on my anticipated compensation for the year.
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Old Feb 27th 2011, 7:10 pm
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Default Re: Tax on bonus (CA)

Thank you - so bonuses are withheld at special rate but they ultimately get taxed per tax brackets (total income at the end of the year)
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Old Feb 27th 2011, 7:12 pm
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Default Re: Tax on bonus (CA)

Seems about right, my bonus arrives late in the calendar year and I have already passed the social security part of FICA so that removes 6.2% of the 7.65%, bring it down to 37.5%.

Obviously the 43% is on the bonus sum after any deduction for your contributions to your 401k.
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Old Feb 27th 2011, 7:15 pm
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Default Re: Tax on bonus (CA)

I'm not sure whether the withholding on bonuses really is a "special" rate - but that is because after being here for over 20 years I still don't understand the way that the "normal" withholding amounts are calculated.

But, in any case, yes - it is just treated as part of your income when you file your tax returns and will ultimately be taxed at the same rates as all of your other earned income.
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Old Feb 27th 2011, 10:06 pm
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Default Re: Tax on bonus (CA)

Originally Posted by E3only View Post
Thank you - so bonuses are withheld at special rate but they ultimately get taxed per tax brackets (total income at the end of the year)
The paryoll department can withhold bonuses in either of two methods but at the end of the year it is taxed the same as other earned income. It is normally withheld at a higher rate than your normal income because your normal income calculations already includes deductions and the lower marginal tax brackets for that income.

http://www.consumerismcommentary.com...-on-bonus-pay/
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Old Feb 27th 2011, 11:07 pm
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Default Re: Tax on bonus (CA)

Originally Posted by Michael View Post
The paryoll department can withhold bonuses in either of two methods but at the end of the year it is taxed the same as other earned income. It is normally withheld at a higher rate than your normal income because your normal income calculations already includes deductions and the lower marginal tax brackets for that income.

http://www.consumerismcommentary.com...-on-bonus-pay/
Thanks guys, appreciated. I understand now....
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Old Feb 28th 2011, 12:06 am
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Default Re: Tax on bonus (CA)

Read only if you don't mind being bored:

The special withholding rates on bonuses are because employers/payroll companies use tables produced by the government/state to calculate your withholdings. Essentially these tables assume that the pay you receive in any particular paycheck is one 12th (if paid monthly), 24th (if paid twice a month) or 26th (if paid fortnightly) of your annual pay, and withhold a sensible amount based on that. If a bonus was treated in the same way, for most people the withholdings would be way too high, because the assumed annual income would much more than they actually receive. So the employers have to flag it for the payroll companies so that a more moderate withholding rate of 25% can be used.
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Old Feb 28th 2011, 1:35 am
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Default Re: Tax on bonus (CA)

Originally Posted by Jscl View Post
Read only if you don't mind being bored:

The special withholding rates on bonuses are because employers/payroll companies use tables produced by the government/state to calculate your withholdings. Essentially these tables assume that the pay you receive in any particular paycheck is one 12th (if paid monthly), 24th (if paid twice a month) or 26th (if paid fortnightly) of your annual pay, and withhold a sensible amount based on that. If a bonus was treated in the same way, for most people the withholdings would be way too high, because the assumed annual income would much more than they actually receive. So the employers have to flag it for the payroll companies so that a more moderate withholding rate of 25% can be used.
Makes complete sense...
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