Burned by the Bonus!
by Dave Ramsey
Dear Dave,
My husband always gets a bonus at work around the first of the year. The problem is that his company never takes enough out in taxes, and we get clobbered at tax time. He makes $150,000 a year, and this time his bonus was $105,000. They withheld 18 percent, but that’s not enough. What should we do?
Karen
Dear Karen,
If you guys make $150,000 a year, that puts you in the 33 percent tax bracket – with or without the bonus. That means 33 to 38 percent of his bonus money will end up in Washington.
If I woke up in your shoes, I wouldn’t leave it up to the government or the company to get it right. I’d put about 22 percent of the bonus amount into a money market account just to be safe. I’d just let it sit there and be ready when tax time rolls around. That way you’ll be fine if you owe money, and you’ll have some extra savings if you don’t!
– Dave
Photo by Dani Simmonds
Posted by Norrine
from Ogden UT
My concern is the high penalty assessed by the IRS if your withholding is insufficient. I would happily pay my tax in April for the privilege of using my own money throughout the previous year, but the IRS does not see it that way. I don't know if the bonus situation merits different consideration, but it may well be that you need to set up quarterly contributions to the IRS, rather than simply having a nest egg to cover the shortfall in April???
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Posted by Eileen
from Colorado
Dave, I love your columns. Keep up the good work. For the taxes the bonus spawns, the taxpayer needs to be sure that 110 percent of the prior years liability has been given to the government the year the income was generated. Holding the amount due to wonderful Washington in a safe place is good, but to avoid penalties, make sure enough has been sent along to the federal goverment in the tax year the income was made.
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Posted by Todd
from Southern California
I have a slightly different situation where I hold stock in a privately-held company (an S-Corporation). I receive a tax statement, K-1, for my "share" of the previous year's profits which I am taxed on. One particularly profitable year put me in a position that my withholdings fell so short of what I owed that my CPA said I could be forced to pay estimated taxes if the next year's withholdings were not within 10% of the owed amount.
My take on the bonus issue is to do as Dave suggested and put the money aside but I would increase the withholdings on my salary check to not be too far off the mark come the next tax filing and draw from the bonus set-aside to make up what my check was shorted.
In addition to my K-1, my wife is mostly paid by 1099's. I over-withhold to compensate for her variable 1099 income also. We've been bitten hard in the past.
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Posted by Wayne
from Chino, CAl
If this person does not have the correct tax withheld, he will be subject to under estimated tax penalty which would be greater than the interest earned by keeping it in a savings account. It would be wise to pay quarterly estimated taxes. Also, this taxpayer is not necessarily in the 33% tax bracket. Personal exemptions and itemized deductions could bring him into a lower bracket
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