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People at my job are saying that they increase the dependents as high as 9 to get more money for their bonus and they do this 1 week before they get it and change it back to what it was after they got the bonus. Is someone supposed to increase the dependents for federal or state or both? And does this affect their tax return even though they increase dependents up as high as 9 but only for 1 week? Before this they are saying they had it as low as 0 and 1.
At the end of the year, it will make no real difference, as taxes are paid on gross income, not on weekly withholding declarations. Your coworkers will either get a lower refund, or owe more.
Their logic leaves me scratching my head - my only guess is it helps them short term. When it comes to filing their tax returns, wouldn't it balance out?
Maybe their bonus is taxed less if they do that? I really don't know.
That would be the rational for doing it.
Bonuses are a bit weird when it comes to taxes, and how they are taxed depends n decisions made by your employer. The employer can withhold at a flat rate, or at the rate indicated by your exemptions. Your employer apparently does the latter.
Because bonuses are often many times the size of s standard weekly (biweekly, whatever) check, the IRS tax tables dictate a higher level of withholding, because it looks like you are earning more money. As an example:
If you earn $1000/week, you are withheld as if you earn $52,000/year.
If you get a $5000 bonus, and they add it to your weekly pay, you are withheld as if you earn $312,000, year. That is obviously a higher withholding rate, so it will look really high.
At the end of the year, when you file taxes, no matter what was withheld for your bonus, you will be taxed as if you earned $57,000 that year, because that is the actual gross wage. This means if a lot was withheld, you will get a bigger refund.
I calculate my allowances based on what I think I'm going to make full year including assuming full bonus. An allowance of 4 had me oweing only about 850 to feds when I did my taxes
They are doing this so they don't get taxed as hard on their bonus. In the end it's a wash. Their taxes next year are what they are. If they had not done this they may have gotten more back next year or owed less. But they choose to take some $ now as opposed to waiting a year.
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