Where did my Annual Bonus go?

I got my bonus! Well, most of it anyway. After all taxes I ended up with barely more than 50% of the gross amount. For some reason I have been laboring under the false impression that there is a special tax bracket for bonuses. But after some research and this article at TheStreet.com, I realize that’s a myth (for federal taxes at least). Apparently some states also have a special tax on annual bonuses?

In short, the abnormally high amount of tax withheld is due to our tiered income tax system. For us as a married couple filing jointly in 2004, the first $14,300 of overall income is taxed at 10%, the amount between $14,300 and $58,100 at 15%, and the amount between $58,100 and $117,250 at 25% (I wish I could go higher). But the bonus is basically taken as being added on the very top, so it is taxed at (for us) 25% federally. Add in state, Social Security, and Medicare taxes, and that’s where it all goes. (Note that I am ignoring tax deductions like mortgage interest or the standard deduction.)

Still, of course the bonus is nice. I don’t have any plans for it, I am treating it like any other income just like Uncle Sam. That big screen I saw at Costco was nice, though… ahem. One thing I did notice was that nothing was taken out for my 401k. That’s a shame, since that means I am losing out on the company match for that part of my income. Hopefully this will help me get on track for my Mid-Term Goal!

Note: Tax stats taken from SaveWealth.com

Comments

  1. I am guessing that they probably take the maximum amount out so that people don’t get to next year and have to pay more income tax than they were expecting. For most people it is “out of site, out of mind,” when it comes to taxes.

    JLP

    http://AllThingsFinancial.blogspot.com

  2. Anonymous says:

    You can have 401(k) contributions taken out of a bonus, but I think you have to specifically request it. It probably also varies by employer.

  3. JLP-
    Why let the gov’t make the intrest off your money? I give the minimum on my w4 so I can invest that cash I would be giving if I made the max on federal tax. I dont want the govt making money off my hard earned pay check. If I invest wisley I can make up any differences if I do owe in april. But with my IRA and 401k contributions and my house I normaly get a return.

    My 2 cents.

Speak Your Mind

*