+1
Yep, +1 to greenie. The withholding rate is higher (probably because they know people have a tendency to blow bonuses before tax time) the tax rate you pay on it is no different from any other type of wage income.
Many people (not pointing at you, but lots of people who don’t understand taxes) equate withholding = tax owed which is very false. I don’t have any withholding applied to dividends I receive, doesn’t mean there is no tax owed.
Just to make the Canadians jealous, my effective rate this year is about 13%. Not bad I guess, relative to other places.
What would I do with 20% more take home income…
I just checked, you’re correct (albeit my tax rate is 33% wtf). At the same time, whether you call it a tax with a refund or withholding, its only a matter of semantics since i cannot change the withholding rate.
^It’s not just a matter of semantics. It’s your money that you’re entitled to. You just don’t get access to it until you get your refund.
If you have withholding at a 33% rate, but are paying 15% tax, then you should get 18 cents on the dollar of income back when you get your refund. AT $100,000 of bonuses, that’s an $18,000 refund.
Ah, read that from a different angle. As far as payroll is concerned, salary and bonus taxes are withheld differently, but, yes, the government treats it all the same come April 15th. Nevertheless, there’s nothing I can do about giving the gov’t an interest free loan.
Giving the gov’t an interest free loan is a lot better than realizing the gov’t GAVE you an interest free loan and now they want to be paid back.
IRS publication 15 covers withholding. Usually only low paid commissioned employees automatically have too much money withheld. The default for most companies is 25% withholding for supplemental income. The more common problem is not having a high enough withholding rate which leaves the employee either paying additional quarterly, requesting increased withholding by the company, or paying penalties around tax time. The company does have some discretion and can choose to withhold from supplemental income at the same rate as regular wages which in some cases can be 0%. Certain pay procedures have to be followed. If you normally are receiving a refund, you may want to approach your employer about reducing your withholding. It is possible in a lot of cases even if pay stubs are separate. And if a finance professional uses the terms “withholding” and “tax” interchangeably, my guess is the interview is over. Certainly would be if I was conducting. I would probably make sure there was not a miscommunication, but if someone tried to tell me bonuses are taxed at a different rate, I wouldn’t have much choice. My clients would have my ass if I let that individual touch their money. Additional pay can cause an increase in tax bracket, but to say bonuses are taxed differently than wages brings up many concerns. One is defending an inaccurate position. Exposes issues of overconfidence and arrogance. Having been humbled is a must have experience in finance.
I make sure i get an interest free loan. Go figure. Maybe I need to brush up on my understanding of TVM, penalty rates, and the buffer that is allowed until penalties kick in. Is this a liberal arts forum?
For sure. In theory, getting the most out of your paycheck and pocketing the money now is the best course of action; and, of course, doing so without incurring any penalties. However, as often the case, from a cash flow perspective, have a large tax bill come due in April can really cramp one’s style.
It’s akin to the discussions around paying off low interest debt early. Yes, from a purely financial perspective you should always invest the money if you can make a higher rate of return than the cost of your loan. But, in practice the cash flow benefits from paying off debt and ridding yourself of a monthly payment puts you in a better place financially.
I put zero for my w4 withholding. Yes, they take more out than they should and I get refund. However, it forces me to live on less which I’m sure i’d be unable to do. That kickback come April is a nice hunk of play dough to invest.
Given your self-proclaimed lack of discipline, sounds like a good plan. Dave Ramsey might concur. Along the lines of home ownership can be “forced” savings, even though real estate historically struggles to keep up with inflation. Props to your self awareness. While paying off debts without regard to interest rates makes me a little ill, I get it on the psychological level. If what is correct theoretically is not implemented properly, what’s the point. Go with what will leave you with more in the end. But maybe you could have less withheld, and just forward the difference to me. I’ll return it to you every first quarter of the year.
Thank you for the lesson and the additional insight. I will reclaim my humility and state the obvious that taxes are certainly not my strength. Since you appear to be someone with considerable knowledge on the subject, can you inform me what IRS quantifies as “low paid” commissioned employees?
Can’t speak for the IRS, but I can tell you that the 25% default is because that is appropriate for “most” people. “Low” would be if your base, considering deductions, does not bump you into the 25% tax bracket. That is what causes the excess withholding…And just an interesting side note, if you earn more than a million, the default is higher, seriously.
Let’s be honest, there is nothing - nothing - interesting about taxes. My man Cain would have solved this bs with his 999 implementation.
+1
Why are we not in the streets? Not even a right/left thing. Does anybody defend the current system? Such a strain on EVERYONE. So perverse.
Respect.
All depends on your situation. Are you married filing jointly? Does your wife work? What other tax considerations are there?
What Ghibli is saying, in an asshat sort of way, is that a well compensated employee won’t be getting a refund based on the 25% automatic withholding that applies to bonuses. A BSD is going to be in a higher tax bracket anyway and could very well end up having to pay additional taxes on top of that 25%. However, given the variables mentioned above, it’s not that straightforward.
Blake? Is that you?
Maybe you should go brush up on your knowledge of Behavioral Finance or human psychology.
We all know that strictly economically speaking, it’s more beneficial to pay zero to Uncle Sam, pocket and invest the money at a positive interest rate, then pay the man on April 15. (Assuming, of course, that any penalties assessed by the IRS are lower than the rate of return on an your chosen investment.) Some people (like me and CvM) choose to have them withhold more for various, noneconomic reasons. And that’s okay.
Not every decision we make boils down to an NPV calculation with the principle of diminishing marginal utility. Some decisions are emotional, like knowing your house is paid off, that you’re debt free, or that you won’t have a larger-than-expected expense on April 15.
Go spout your self-righteous bullshit somewhere else.
I wasn’t aware that Sweep was interviewing for a job.