OT: Taxes vs. withholding (was RE: Salary Question: Bonus?)

[Combs, Richard]

Gene Kim-Eng wrote: 

> salary, depending on how they are paid out.  In California, 
> certain specific categories of bonus payment are taxed at a 
> flat rate that is independent of the employee's normal tax bracket.

Chiming in a bit late here, but this is a common error that needs
correcting: Greg's original comment - "bonuses have a higher tax rate
(55-60% IME)" - and the responses to it have all incorrectly referred to
the *tax rate* on bonuses when it's really the *withholding* that you're
talking about. 

The amount *withheld* from your pay isn't the amount you're taxed, it's
merely a rough estimate of what your tax liability will be. That's why,
around April 15, you'll either get a refund of the excess withheld or
have to write a check for the shortfall. 

Bonuses aren't taxed at a higher rate -- they're ordinary earned income
taxed at the same rate as your salary. Withholding on a bonus may be
higher for various reasons, including that it's calculated using a fixed
percentage, while your salary withholding is calculated using your W-4. 

In fact, if you know you're going to get a bonus and how much will be
withheld (or you get it early enough in the year), you can factor it
into your tax liability calculation, file a new W-4, and have your
salary withholding adjusted so that the total withheld over the year
more closely matches your liability.

Or you can just wait -- you'll get the excess back as a refund after you
file your return. Of course, they don't pay interest for the free use of
your money in the meantime. :-(

Richard


------
Richard G. Combs
Senior Technical Writer
Polycom, Inc.
richardDOTcombs AT polycomDOTcom
303-223-5111
------
rgcombs AT gmailDOTcom
303-777-0436
------