OT: Bonus Checks
s275ironman
Detroit
I received a memo yesterday that in a couple weeks, I will be receiving my yearly profit sharing bonus. It is the only paper check I receive from my employer as all my weekly paychecks go into my bank account through direct deposit.
The thing is, before I receive these bonus checks, I am informed ahead of time what the pre-tax total is. Then when I actually get my check, I do the math and determine that 37% was taken out to pay taxes. Business has been good for several years, and each year my bonus gets bigger and bigger. The only downside is, that 37% amounts to several thousands of dollars I am paying back in taxes.
Some co-workers have told me that they change their filing status to Tax-Exempt for a few weeks, and then once they receive their bonus check, they will change it again so that they will have taxes taken out of their paychecks for the remainder of the year. I understand that by changing your filing status, your bonus check will be for the full pre-tax amount. However, won't you then need to claim this income and pay taxes on it when you file your tax return? I don't see the point in changing my filing status to Tax-Exempt. I would rather just pay the taxes now and be done with it
It would not surprise me if some members of this board do change their filing status right before receiving a bonus. Please feel free to chime in with your thoughts and opinions on whether it is a good idea or bad idea to do so.
The thing is, before I receive these bonus checks, I am informed ahead of time what the pre-tax total is. Then when I actually get my check, I do the math and determine that 37% was taken out to pay taxes. Business has been good for several years, and each year my bonus gets bigger and bigger. The only downside is, that 37% amounts to several thousands of dollars I am paying back in taxes.
Some co-workers have told me that they change their filing status to Tax-Exempt for a few weeks, and then once they receive their bonus check, they will change it again so that they will have taxes taken out of their paychecks for the remainder of the year. I understand that by changing your filing status, your bonus check will be for the full pre-tax amount. However, won't you then need to claim this income and pay taxes on it when you file your tax return? I don't see the point in changing my filing status to Tax-Exempt. I would rather just pay the taxes now and be done with it
It would not surprise me if some members of this board do change their filing status right before receiving a bonus. Please feel free to chime in with your thoughts and opinions on whether it is a good idea or bad idea to do so.
21 comments
Unless you are going to invest the money and have it grow over the next year I would suggest paying the taxes now. You never know what could happen between now and next tax season, having to pay at that point may put you in a financial bind. It is easier to give the government their share before you get the check than having to write them a check later.
Just spit-balling here, not like I have any personal experience or anything.
A. After 5 years of marriage your wife will still blow your bonus.
Your co-workers are investing the tax portion of bonus money on themselves alone.
Personal joy = good health = savings on doctors, shrinks, pharmacy.
At tax time in April 2019 - that bonus tax will be paid from money out of regular paychecks.
The only reason a person would allow immediate with-holding of tax money that is not due until more than a year is - lack of discipline in having that money available when it is due. yes - this lack of discipline afflicts 40% of us (thereabouts).
I have a separate C-type mutual fund for fun money. This isn't a boring bank account for recurring expenses nor is it long term investments (obviously it is not retirement). Those are separate. That check would go in fun money. It is only moderate risk and that's what I dip into for unnecessary things that just make me smile.
Don't even try to pull funny business with taxes. Not worth it. If you were actually in the 0.1% maybe, but for the 99.9% it is more trouble than it is worth.
Regarding skibum609's comment about cash advances on credit cards my philosophy is that if cash advances on credit cards are a strategy you consider you should also consider not spending money. Then go with the not spending money.
FWIW, I always do the maximum holding.
But my lack of discipline isn't overspending. It is finding the extra energy up front to do things that might make sense. I do what works for me even if it wastes a bit.
Liked your fun-money account idea.
The tax calculation for your paycheck or bonus assumes you make the same amount each pay period. So, the withholding should cover your tax liability at the end of the year. The problem arises when you get a bonus. The tax calculation treats the bonus like a raise instead of a one time event. What happens now is the withholding increases because the calculator put you into a higher tax bracket.
The only difference is getting more money now and possibly paying some in April (if you change your exemptions to adjust withholding calculation) or getting less cash now and a bigger refund when you file taxes (if you leave your exemptions the same).
I used this strategy for 7 years and never owed more than $400 at the end of the year but never got back more than $160. I was always happy and considered my tax strategy to be pretty dialed in.
2016 was my last year working for somebody else and I got a decent bonus in April of that year. It wasn't until I had made my October mortgage payment that my mortgage payments for the year surpassed the Federal Income tax withheld just from my bonus check (not including SS and Medicare withholdings). That thought alone upset me for a good portion of that year...thinking how much of my labor was being stolen for me to support lowlifes who refuse to contribute to society and rely on the government.
I wanted to ask the couple to thank me for buying their camera with my tax payments but thought better of it since we were all drinking and I was a guest!