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I received a small bonus and elected to defer 100% of it into 401(k). I thought that it was not supposed to be taxed, yet when I got my paystab for that bonus, I discovered that all taxes - federal, local social security and Medicare were deducted! The taxable portion of my income on the paystab equals the sum of all taxes. While I understand how they calculated the taxes numerically (SS ans Medicare on the bonus amount, federal and local on the taxable portion amount), I do not understand how the taxable portion was determined. Payroll at my company has not gotten back to me, and HR benefits manager was not able to explain how the taxable portion was determined. Does anybody know how is it possible that federal and local taxes are levied, even if 100% of the bonus is deferred into 401 (k)? Thanks!
Sure. My guess is that your employer processes bonuses a bit different from regular pay. The method of diverting it to your 401k is probably manual, and the only point that payroll could intercede to do this was after taxes were taken out.
At year end, it won't matter much because you will get all of those deductions back.
Here is how I see it playing out.
The bonus is income, and all income is taxed. Depending on the amount of the bonus relative to your regular pay, it may even appear that too many taxes were taken out. None of that matters too much. When you file your taxes next year, you are going to add up all of your income, subtract your deductions, which includes any 401k contributions, and pay tax on the remaining balance.
In some cases too much tax will have been withheld from your check (usually because of bonuses or weeks with a lot of OT), in other cases too little will have been withheld (because of lower than average checks). Regardless, you only pay the appropriate amount of tax dictated by your income.
So it all comes out in the wash at the end of the year. You will have those taxes refunded, and you can then drop them into a 401k
If you want another option that takes a bit more work, goto your payroll dept and increase the number of deductions you claim (which will decrease withholdings and increase take home), and also increase the amount of money to put into your 401k monthly (which will decrease take home). It's a tricky option because number of deductions is a bit of a blunt weapon when it comes to tweaking your withholding amount.
Sorry, not the clearest post I have ever written, but I am happy to clarify if you have any additional qurpestions.
Sure. My guess is that your employer processes bonuses a bit different from regular pay. The method of diverting it to your 401k is probably manual, and the only point that payroll could intercede to do this was after taxes were taken out.
At year end, it won't matter much because you will get all of those deductions back.
Here is how I see it playing out.
The bonus is income, and all income is taxed. Depending on the amount of the bonus relative to your regular pay, it may even appear that too many taxes were taken out. None of that matters too much. When you file your taxes next year, you are going to add up all of your income, subtract your deductions, which includes any 401k contributions, and pay tax on the remaining balance.
In some cases too much tax will have been withheld from your check (usually because of bonuses or weeks with a lot of OT), in other cases too little will have been withheld (because of lower than average checks). Regardless, you only pay the appropriate amount of tax dictated by your income.
So it all comes out in the wash at the end of the year. You will have those taxes refunded, and you can then drop them into a 401k
If you want another option that takes a bit more work, goto your payroll dept and increase the number of deductions you claim (which will decrease withholdings and increase take home), and also increase the amount of money to put into your 401k monthly (which will decrease take home). It's a tricky option because number of deductions is a bit of a blunt weapon when it comes to tweaking your withholding amount.
Sorry, not the clearest post I have ever written, but I am happy to clarify if you have any additional qurpestions.
Good post and suggestions. If I remember correctly, 401K Contributions show up on my check as untaxed for Federal and State but they do still take the deductions of SS and Medicare, so, there is no way around that piece of it.
It could very well just be an after tax contribution. Does your plan have this option? Pretax and Aftertax is kept separated. I never heard of dropping a tax refund into a 401k. So either it was an error by payroll or its in the 401k as after tax. Do you have a 401k phone number to call? Or online access?
You are correct 401k contributions are still subject to SS and Medicare.
Do not call your 401K provider, this is a payroll issue. 401K is exempt from Federal tax, I don't remember on top of my head if it's not subject to the state and local taxes. So, if your bonus was 10,000 and you elected to defer all of it into 401K, you still won't be able to defer the entire amount because social security and Medicare are still due on it. Without seeing your paystub, it's really hard for me to say what happened.
A bonus is taxable so all the standard taxes are taken out first, similar to your normal paycheck (but at a higher tax rate).
At year end, your AGI will be your salary+bonus less all 401k contributions (and any other tax deductions you might declare).
Bonuses are taxed as gifts I believe so you would only get about 60% of the gross amount. When it comes to having that put into your 401k, I believe that the gift tax would still come out regardless.
I've never known a company that would allow you to distribute your 401k differently depending on the type of check. For example, I contribute 10% to my 401k. So if my regular check is $500, I would put $50 into my 401k. When I get a bonus check, it's still set up to contribute 10%. In order for me to change that, I'd have to change my contribution, but that would change the contribution from my regular check as well.
A bonus is taxable so all the standard taxes are taken out first, similar to your normal paycheck (but at a higher tax rate).
A bonus is taxable, but the rate is not necessarily higher. It depends on the amount of bonus, how it is paid, and your annual salary.
Typically taxes are withheld based upon your projected income. In other words, if you earn $52,000 yearly, paid every week, taxes on your $1,000 gross check are deducted as if you earn $52k/year. Pretty straightforward.
If you receive a bonus check, it may be taxed at your standard rate, it may be taxed at a lower rate, or it may be taxed at a higher rate. This depends on how your employer chooses to do things.
Option 1. Bonus is taxed at a straight 25%. Permissible by the IRS, but this may be more or less than your actual marginal rate.
Option 2. Bonus is added to your typical paycheck and then taxed accordingly. As an example, if you make $52,000 as above, and you receive a $100 bonus, you will be taxed as if your annual income is $57,200. ($1,100 x 52). This won't change your marginal rate, so you are going to see nothing particularly unusual in your withheld taxes.
BUT, if you get a $5,000 bonus, you will be taxed as if you earn $312,000 annually. ($6,000x52). You are gong to be absolutely whacked for taxes. Because tax rates are marginal, you can never go backwards on your take home, but you will see a huge chunk withheld.
Option 3. You get two checks. The $1000 weekly check is taxed at the $52,000 salary rate, but the $5000 check is taxed at the $260,000 rate ($5,000x52). Again, a big chunk is withheld. This is not best practice per the IRS, but I have seen it done.
So now you are worried that the higher taxes on your bonus are unfair, because you did not actually earn $312,000. Not to worry, this is why we do annual tax returns. If you received a $100 bonus, at the end of the year you report an income of $52,100 and are taxed accordingly. No real impact here.
If you received a $5,000 bonus, at the end of the year you report total income of $57,000 and are taxed on that amount. Because your bonus check was taxed at a higher rate, you get a refund.
Yes, it's complicated. There are a few minor variations on this theme, but the basic idea is that a large bonus will be initially taxed at a high rate, then refunded.
Quote:
Originally Posted by mdlee3_46041
Bonuses are taxed as gifts I believe so you would only get about 60% of the gross amount. When it comes to having that put into your 401k, I believe that the gift tax would still come out regardless.
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Ok, this is simply flat out wrong. Absolutely incorrect and misleading. Pay no attention, because bonuses are taxed as income, not gifts.
Ok, this is simply flat out wrong. Absolutely incorrect and misleading. Pay no attention, because bonuses are taxed as income, not gifts.
If you would have read my whole post instead of focusing on just 1 word, you would have seen that I said "I believe" which also means I could be wrong or misinformed. If you want to correct somebody, simply correct them and explain how they are wrong instead of being a dick.
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