Getting a bonus. Is there a way not to get taxed on it?
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Getting a bonus. Is there a way not to get taxed on it?
I expected to get a 3k bonus and someone told me if I switch from exempt to non-exempt in the Withholding election, the bonus would not get taxed.
I'm currently an hourly employee (switch from salary) because I'm residing in California. My company is located in AZ.
I'm currently an hourly employee (switch from salary) because I'm residing in California. My company is located in AZ.
Re: Getting a bonus. Is there a way not to get taxed on it?
Exempt and non-exempt has to do with the type of work you do and has nothing to do with your tax withholding. Your employer will withhold the bonus at the IRS bonus rate which is currently 22%.LesBleus** wrote: ↑Tue Jan 18, 2022 6:41 pm I expected to get a 3k bonus and someone told me if I switch from exempt to non-exempt in the Withholding election, the bonus would not get taxed.
I'm currently an hourly employee (switch from salary) because I'm residing in California. My company is located in AZ.
Re: Getting a bonus. Is there a way not to get taxed on it?
I think you are asking about withholding. Your bonus will get taxed unless you are in the 0% tax bracket for 2022.
If tax is withheld on your bonus, just change your W-4 so that you have have less tax withheld from your regular paychecks going forward to make up for that.
If tax is withheld on your bonus, just change your W-4 so that you have have less tax withheld from your regular paychecks going forward to make up for that.
Re: Getting a bonus. Is there a way not to get taxed on it?
Whether or not taxes are withheld has nothing to do with whether or not you are taxed on it. Withholdings are just payroll doing your estimated taxes for you, based on your w4.
Your W4 asks you to attest that all the information therein is accurate to the best of your knowledge and exempt, in this context, means you owed no federal taxes in the prior year.
Your W4 asks you to attest that all the information therein is accurate to the best of your knowledge and exempt, in this context, means you owed no federal taxes in the prior year.
Last edited by sailaway on Tue Jan 18, 2022 6:49 pm, edited 1 time in total.
Re: Getting a bonus. Is there a way not to get taxed on it?
You can probably engineer your W-4 withholding to not have taxes deducted from your bonus, but one way or the other you will owe taxes on the bonus, and you'll settle up upon computing and filing your next tax return. (It should be noted that falsely adjusting your W-4 without good reason--in other words, only to avoid withholding without offsetting factors like estimated tax payments or a known decrease in income in the future or allowances like unborn children--is not permitted by the IRS and they may well call you as well as your employer on it.)
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Re: Getting a bonus. Is there a way not to get taxed on it?
Bonus is taxed as the rest of your earned income. There's no way not to get taxed on it. If there were such a way, why would anyone pay any income tax at all?
Re: Getting a bonus. Is there a way not to get taxed on it?
Bonuses are considered supplemental wages by the IRS and federal income tax is withheld at a flat 22%, regardless of what your typical withholding is.
Re: Getting a bonus. Is there a way not to get taxed on it?
In general, there is no way to avoid paying taxes on earned income like this. If there were, everyone would do it.
As others have said, it’s important to understand the difference between tax withholding and total tax owed. Reducing your withholding without reducing your total tax owed will mean you’ll just pay more in April of the following year. And if you owe too much, you’ll owe underpayment penalties too.
There are certain forms of tax-free income, like interest paid from municipal bonds, but these are niche situations and don’t apply to earned income.
There is also a 0% tax “bracket”, which isn’t really a bracket, but it results if your total personal deductions (eg. standard deduction, $12,950 single and $25,900 married) is more than your taxable income. Then you pay $0 tax.
Depending on your employer, they may be amenable to shifting the tax year you receive the income (eg. Paying a year-end bonus in the following year), if you expect to be in a lower tax bracket in the other year. It probably won’t make the income tax-free but will lower the tax rate you pay on it.
Another possibility, especially with a smaller employer, is that they *may* be willing to deposit the bonus into a 401k instead. That would mean you pay no taxes on it today. It would grow tax-deferred, and after age 59.5, you can withdraw it penalty-free. It’s still taxable income when you withdraw, but some retirees pay a 0% tax rate, for example if they have little income besides social security. Larger employers have more rigid rules with 401k non-discrimination testing and such, and are less likely to be able to do something unusual like that.
Cheers!
As others have said, it’s important to understand the difference between tax withholding and total tax owed. Reducing your withholding without reducing your total tax owed will mean you’ll just pay more in April of the following year. And if you owe too much, you’ll owe underpayment penalties too.
There are certain forms of tax-free income, like interest paid from municipal bonds, but these are niche situations and don’t apply to earned income.
There is also a 0% tax “bracket”, which isn’t really a bracket, but it results if your total personal deductions (eg. standard deduction, $12,950 single and $25,900 married) is more than your taxable income. Then you pay $0 tax.
Depending on your employer, they may be amenable to shifting the tax year you receive the income (eg. Paying a year-end bonus in the following year), if you expect to be in a lower tax bracket in the other year. It probably won’t make the income tax-free but will lower the tax rate you pay on it.
Another possibility, especially with a smaller employer, is that they *may* be willing to deposit the bonus into a 401k instead. That would mean you pay no taxes on it today. It would grow tax-deferred, and after age 59.5, you can withdraw it penalty-free. It’s still taxable income when you withdraw, but some retirees pay a 0% tax rate, for example if they have little income besides social security. Larger employers have more rigid rules with 401k non-discrimination testing and such, and are less likely to be able to do something unusual like that.
Cheers!
Re: Getting a bonus. Is there a way not to get taxed on it?
This is correct. Bonuses are supplemental wages. Your company is required to use the flat federal income tax rate of 22%. If you are a CA taxpayer they should also w/h the flat CA rate of 10.23%.
You can change your w/h on your regular paychecks by adjusting your w-4 if you feel the supplemental wage tax w/h will cause you to overpay your income taxes for the year.
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Re: Getting a bonus. Is there a way not to get taxed on it?
When I received a bonus in December, I was able to avoid paying tax on a portion of it by using it to accelerate charitable contributions into 2021 and thus increasing my itemized deductions. (I was right around the threshold for switching from the standard deduction to itemizing.) If you make charitable contributions and have enough other deductions to approach the standard deduction threshold, you could “bunch” the charitable deductions in one year or establish a donor advisory fund.
Re: Getting a bonus. Is there a way not to get taxed on it?
I get a bonus every February.
Over the past couple of years...I've set it to dump 85% of it into my 401k. It front loads the contributions which gets them into the market sooner (a plus), and then I just set my contributions lower on a per-month basis for the rest of the year (freeing up cash flow which is also nice) so that it maxes out.
I suppose that's a way to do what you're asking...for now anyway.
Over the past couple of years...I've set it to dump 85% of it into my 401k. It front loads the contributions which gets them into the market sooner (a plus), and then I just set my contributions lower on a per-month basis for the rest of the year (freeing up cash flow which is also nice) so that it maxes out.
I suppose that's a way to do what you're asking...for now anyway.
Re: Getting a bonus. Is there a way not to get taxed on it?
Whoever told you this was confused. Bonuses get taxed.LesBleus** wrote: ↑Tue Jan 18, 2022 6:41 pm I expected to get a 3k bonus and someone told me if I switch from exempt to non-exempt in the Withholding election, the bonus would not get taxed.
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Re: Getting a bonus. Is there a way not to get taxed on it?
You may be getting confused by tax withholding vs actual tax. It is somewhat well known that bonuses are considered supplemental income and get withheld at a flat rate. This very often gets confused that the amount withheld is your actual tax, but really it just adds to your tax withholding for the year like your other paychecks and then you settle up for the right amount at the tax return. This flat rate may be higher than your actual income tax rate so you might end up over withholding and getting it back on your tax return as a refund. If you earn a lot, it is also possible that the flat withholding rate is actually less than your actual marginal tax rate and then you end up owing tax on your return.
Re: Getting a bonus. Is there a way not to get taxed on it?
If you want the bonus now, I don’t see how that’s possible. Exempt refers to hourly vs salary, not tax-exempt. But you could change your 401k contribution for a week and put most of your check in it. That may avoid the taxes, you just don’t get the bonus right away.LesBleus** wrote: ↑Tue Jan 18, 2022 6:41 pm I expected to get a 3k bonus and someone told me if I switch from exempt to non-exempt in the Withholding election, the bonus would not get taxed.
I'm currently an hourly employee (switch from salary) because I'm residing in California. My company is located in AZ.
Re: Getting a bonus. Is there a way not to get taxed on it?
I find this to be brilliant, I’m going to do the math today to see if the overall impact to my finances.guitarguy wrote: ↑Wed Jan 19, 2022 6:01 am I get a bonus every February.
Over the past couple of years...I've set it to dump 85% of it into my 401k. It front loads the contributions which gets them into the market sooner (a plus), and then I just set my contributions lower on a per-month basis for the rest of the year (freeing up cash flow which is also nice) so that it maxes out.
I suppose that's a way to do what you're asking...for now anyway.
Re: Getting a bonus. Is there a way not to get taxed on it?
Be sure you understand your company matching program!BradJ wrote: ↑Wed Jan 19, 2022 7:58 amI find this to be brilliant, I’m going to do the math today to see if the overall impact to my finances.guitarguy wrote: ↑Wed Jan 19, 2022 6:01 am I get a bonus every February.
Over the past couple of years...I've set it to dump 85% of it into my 401k. It front loads the contributions which gets them into the market sooner (a plus), and then I just set my contributions lower on a per-month basis for the rest of the year (freeing up cash flow which is also nice) so that it maxes out.
I suppose that's a way to do what you're asking...for now anyway.
Re: Getting a bonus. Is there a way not to get taxed on it?
Yes - definitely. I didn't mention this, but be sure you don't trigger anything that will lower your match.sailaway wrote: ↑Wed Jan 19, 2022 8:01 amBe sure you understand your company matching program!BradJ wrote: ↑Wed Jan 19, 2022 7:58 amI find this to be brilliant, I’m going to do the math today to see if the overall impact to my finances.guitarguy wrote: ↑Wed Jan 19, 2022 6:01 am I get a bonus every February.
Over the past couple of years...I've set it to dump 85% of it into my 401k. It front loads the contributions which gets them into the market sooner (a plus), and then I just set my contributions lower on a per-month basis for the rest of the year (freeing up cash flow which is also nice) so that it maxes out.
I suppose that's a way to do what you're asking...for now anyway.
My bonuses aren't large enough personally to affect this; even after the big contribution early in the year, I still contribute enough monthly for the rest of the year to maximize the match. As my salary and/or bonus increases, I plan to lower the % taken out of the bonus to make sure I don't miss this target.
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Re: Getting a bonus. Is there a way not to get taxed on it?
Increase your 401k contribution by $3K if you have room.LesBleus** wrote: ↑Tue Jan 18, 2022 6:41 pm I expected to get a 3k bonus and someone told me if I switch from exempt to non-exempt in the Withholding election, the bonus would not get taxed.
I'm currently an hourly employee (switch from salary) because I'm residing in California. My company is located in AZ.
This only defers, but you will generally come out ahead over along period of time over just taking it as income.
Alternatively, pay the tax and put the rest into Roth. Think long term.
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Re: Getting a bonus. Is there a way not to get taxed on it?
If there were a way to have bonuses not taxed (not with holding, but taxed), I'd be all over it. I look at my last of the 2021 pay stub and my bonuses make up nearly 50% of my total income. Well, besides my tradeline sales.
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Re: Getting a bonus. Is there a way not to get taxed on it?
This seems to be a confusing concept for many people, and I am not sure why.
Basic tax illiteracy?
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
Re: Getting a bonus. Is there a way not to get taxed on it?
You pay me now or you pay me later
“Every deduction is allowed as a matter of legislative grace.” US Federal Court
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Re: Getting a bonus. Is there a way not to get taxed on it?
A lot of people at my company change their 401k election in the week prior to the bonus being distributed and fund their 401k pre tax using the bonus funds. I prefer to DCA over the course of the year, but its one way to pull it off.LesBleus** wrote: ↑Tue Jan 18, 2022 6:41 pm I expected to get a 3k bonus and someone told me if I switch from exempt to non-exempt in the Withholding election, the bonus would not get taxed.
I'm currently an hourly employee (switch from salary) because I'm residing in California. My company is located in AZ.
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Re: Getting a bonus. Is there a way not to get taxed on it?
it amazes me how often I hear people (I work in a hospital with people of all income ranges) say "I don't work overtime because they tax 50% of it. They don't understand what marginal tax rates even are
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Re: Getting a bonus. Is there a way not to get taxed on it?
Thank you everyone for the information. I had my doubts about not getting taxed because I know we always get taxed!
I'll just take the bonus as it is.
I'll just take the bonus as it is.
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Re: Getting a bonus. Is there a way not to get taxed on it?
MathWizard wrote: ↑Wed Jan 19, 2022 9:51 amIncrease your 401k contribution by $3K if you have room.LesBleus** wrote: ↑Tue Jan 18, 2022 6:41 pm I expected to get a 3k bonus and someone told me if I switch from exempt to non-exempt in the Withholding election, the bonus would not get taxed.
I'm currently an hourly employee (switch from salary) because I'm residing in California. My company is located in AZ.
This only defers, but you will generally come out ahead over along period of time over just taking it as income.
Alternatively, pay the tax and put the rest into Roth. Think long term.
Re: Getting a bonus. Is there a way not to get taxed on it?
try putting more into your 401(k) when you can.
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Re: Getting a bonus. Is there a way not to get taxed on it?
I did exactly that. I went on my 401 plan and designated the dollar amount. Put the whole bonus into the 410, no tax. Then after, you change back. Make sure to do it inside the time frames to let the system make the changes. This is a no brainer unless you need the bonus money.UnLearnYourself wrote: ↑Wed Jan 19, 2022 9:58 amA lot of people at my company change their 401k election in the week prior to the bonus being distributed and fund their 401k pre tax using the bonus funds. I prefer to DCA over the course of the year, but its one way to pull it off.LesBleus** wrote: ↑Tue Jan 18, 2022 6:41 pm I expected to get a 3k bonus and someone told me if I switch from exempt to non-exempt in the Withholding election, the bonus would not get taxed.
I'm currently an hourly employee (switch from salary) because I'm residing in California. My company is located in AZ.
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Re: Getting a bonus. Is there a way not to get taxed on it?
I'm not sure this is correct. Businesses have choices regarding withholding for supplimental wages. I believe they can choose to use the regular withholding method as if the bonus was regular pay during the period the bonus is paid, depending on the details. That said, most employers who pay a bonus which is separate from regular pay just withhold at the flat rate. But I've seen differently. For example, my wife's annual bonus was added to regular pay for that period and "normal" withholding methods were used.
Supplemental wages combined with regular wages. If you pay supplemental wages with regular wages but don't specify the amount of each, withhold federal income tax as if the total were a single payment for a regular payroll period.
Supplemental wages identified separately from regular wages. If you pay supplemental wages separately (or combine them in a single payment and specify the amount of each), the federal income tax withholding method depends partly on whether you withhold income tax from your employee's regular wages.
If you withheld income tax from an employee's regular wages in the current or immediately preceding calendar year, you can use one of the following methods for the supplemental wages:
a) Withhold a flat 22% (no other percentage allowed).
b) If the supplemental wages are paid concurrently with regular wages, add the supplemental wages to the concurrently paid regular wages and withhold federal income tax as if the total were a single payment for a regular payroll period. If there are no concurrently paid regular wages, add the supplemental wages to, alternatively, either the regular wages paid or to be paid for the current payroll period or the regular wages paid for the preceding payroll period. Figure the income tax withholding as if the total of the regular wages and supplemental wages is a single payment. Subtract the tax already withheld or to be withheld from the regular wages. Withhold the remaining tax from the supplemental wages. If there were other payments of supplemental wages paid during the payroll period made before the current payment of supplemental wages, aggregate all the payments of supplemental wages paid during the payroll period with the regular wages paid during the payroll period, figure the tax on the total, subtract the tax already withheld from the regular wages and the previous supplemental wage payments, and withhold the remaining tax.
If you didn't withhold income tax from the employee's regular wages in the current or immediately preceding calendar year, use method 1b.
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes" (even in taxable accounts).
Re: Getting a bonus. Is there a way not to get taxed on it?
+1 The" if you have room" is the key. Otherwise just add it to your taxable whole market index fund and forget about it.MathWizard wrote: ↑Wed Jan 19, 2022 9:51 amIncrease your 401k contribution by $3K if you have room.LesBleus** wrote: ↑Tue Jan 18, 2022 6:41 pm I expected to get a 3k bonus and someone told me if I switch from exempt to non-exempt in the Withholding election, the bonus would not get taxed.
I'm currently an hourly employee (switch from salary) because I'm residing in California. My company is located in AZ.
This only defers, but you will generally come out ahead over along period of time over just taking it as income.
Alternatively, pay the tax and put the rest into Roth. Think long term.