Taxation of Comission and Bonus Pay

Yes, they are withheld at the maximum rate, and you will get back the difference between the highest bracket and your bracket.

It's taxed higher because of the amount on one check, so the withholding rate increases. You can plan for these events and change your W4 every time you receive your commission/bonus payment.

Quote from PiratesSayARRR : It's taxed higher because of the amount on one check, so the withholding rate increases. You can plan for these events and change your W4 every time you receive your commission/bonus payment.

Can you elaborate on this? I don't quite understand. I don't think I have any exemptions on my W4 now.

Quote from Dem Bums : Can you elaborate on this? I don't quite understand. I don't think I have any exemptions on my W4 now.

If you adjust your exemptions up when you get the large checks there will be less withholding of taxes. No point in giving the government an interest free loan.

Go here: www.paycheckcity.com and play around with the various withholdings.

Quote from PiratesSayARRR : It's taxed higher because of the amount on one check, so the withholding rate increases. You can plan for these events and change your W4 every time you receive your commission/bonus payment.

Partially, but that is not the whole explanation. Bonuses are taxed at a higher rate per the IRS.

Quote from tennis8363 : Partially, but that is not the whole explanation. Bonuses are taxed at a higher rate per the IRS.

No they're not.

Quote from tennis8363 : Partially, but that is not the whole explanation. Bonuses are taxed at a higher rate per the IRS.

No they are not.

Quote from PiratesSayARRR : No they are not.

Yes, they are:

http://blog.turbotax.intuit.com/2...y-the-irs/

I have worked in HR for a number of years, they are almost always taxed at the 25% rate under the percentage method.

Quote from tennis8363 : Yes, they are: http://blog.turbotax.intuit.com/2...y-the-irs/ I have worked in HR for a number of years, they are almost always taxed at the 25% rate under the percentage method.

No they are not almost always taxed at 25%. Generally the application of the aggregate rule is correct. There are only a few instances where you can use the percentage method. The instances where it is allowed the employer may choose between the aggregate or the flat. Because of this most businesses elect to always use the aggregate method. (I'm a CFO).

The excessive withholding is usually due to the way your company's payroll software deals with paying you at different intervals. For instance, your regular salary is paid weekly, so the lsoftware sees that you earn X amount multiplied by 52 pay periods, then calculates how much to withhold based on that.

You are also paid commission once per month. That check is triple the amount of your weekly paycheck, but the software thinks it's a weekly check (so it withholds taxes as if you made $1500 per week rather than taxing it as $1500 per month ($1500 x 12). That is why higher dollar, less frequent checks (especially annual or quarterly bonuses) have way too much tax withheld! But it all comes out in the wash when the year is over and you file your tax return.

A 'good' accountant/boss will take the time to manually adjust the withholding on commission and bonus checks before issuing them. That way the employee gets a larger check immediately rather than letting Uncle Sam borrow it for a year!

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Isn't all this just about how the IRS calculates the withholding from a bonus payment? Isn't a bonus or commission treated like ordinary income when it comes to actually filing your tax return?

Any bonus or off pay period check I receive is usually taxed around 40%.

I have before gone into my W4 at work and changed my status to "exempt" for that one pay check, then changed it back. Not sure how ethical this is, but it makes a huge difference on the paycheck.