Many of us look forward to the holidays for many reasons, not the least of which is bonus pay. We all love to receive the extra cash during this time of year, it makes our lives a little easier and a (hopefully) a lot happier.
Have you ever looked at your bonus check and wondered why "they" took out so much in taxes. You're not alone. The reason is, the IRS considers bonus pay supplemental income and therefore your employer must withhold federal taxes at a higher rate. The bad news is your net check is smaller than you'd like. The good news is when you file your tax return you'll have withheld enough from that extra income so as not to owe money based upon that bonus check.
Now what about if you have a really cool employer that just writes you a check and doesn't withhold any taxes. At first it may seem as if this is the most Awesome. Boss. Ever. but remember you still have to pay taxes on all that extra cash. And if your boss is really that awesome he probably also gave you a substantial bonus tax-free. To avoid owing (or at the very least receiving a smaller refund) when you file your taxes you'll need to set aside some of that money to offset the increase in income from receiving said awesome bonus.
Knowing how much to set aside is an entirely different question. The simplest way to figure out how much to set aside is to find your previous years' tax return and look at your effective tax rate. Most tax professionals provide a summary of your tax year and at the bottom of that summary is your effective tax rate. It may look something like this:
Have you ever looked at your bonus check and wondered why "they" took out so much in taxes. You're not alone. The reason is, the IRS considers bonus pay supplemental income and therefore your employer must withhold federal taxes at a higher rate. The bad news is your net check is smaller than you'd like. The good news is when you file your tax return you'll have withheld enough from that extra income so as not to owe money based upon that bonus check.
Now what about if you have a really cool employer that just writes you a check and doesn't withhold any taxes. At first it may seem as if this is the most Awesome. Boss. Ever. but remember you still have to pay taxes on all that extra cash. And if your boss is really that awesome he probably also gave you a substantial bonus tax-free. To avoid owing (or at the very least receiving a smaller refund) when you file your taxes you'll need to set aside some of that money to offset the increase in income from receiving said awesome bonus.
Knowing how much to set aside is an entirely different question. The simplest way to figure out how much to set aside is to find your previous years' tax return and look at your effective tax rate. Most tax professionals provide a summary of your tax year and at the bottom of that summary is your effective tax rate. It may look something like this:
Based on the effective tax rate above, if your bonus is $1000 you should set aside $135.90. Thats $1000 x 13.59%. Your effective tax rate may be different, check out your tax return.
If don't want to bother with finding last year's return then just set a side a nice round number like 20% of your check. That makes it easy peasy and as long as your tax rate isn't above 20% you should be safe.
If don't want to bother with finding last year's return then just set a side a nice round number like 20% of your check. That makes it easy peasy and as long as your tax rate isn't above 20% you should be safe.
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