Is it fair to tax a bonus?

I just started a new job and I came across an interesting situation. It seems quarterly bonus were given out. I guess the Reservations Dept won the big one and they weren’t pleased when they got their check. The bonus as stated minus taxes.

Well to make a long story short the dept folk went to H/R and H/R agreed. If the bonus was $200 then they should physically get $200.00. So what accounting decided to do was make the bonus like $220.00 so when it gets taxed it’ll be roughly $200.00

Does this make sense. I mean isn’t the amount of tax taken out of you check dependent on what you declare?

First: Yes. Of course it’s fair to tax a bonus. Why should earned income be taxed differently according to when/how an employer decides to pay it?

Second: I’m not sure what you’re saying here. Yes, the tax withheld from a bonus depends on the instructions on your W-4, the size and timing of the bonus, whether more are expected over the course of the year, and other factors.

Generally, if the bonus is not expected to be a material part of total compensation (IIRC <5%), the federal income tax withholding instruction is (again, IIRC) 20% for taxpayers in the middle brackets. Your state will likely have similar “simplifying” rules for bonus withholding. FICA is taken out of bonuses unless the taxpayer has exceeded the total amount of FICA withholding for the year (apx $70K).

I think what happened is that H/R agreed to increase the bonus by some amount so that the after-tax payout to the average recipient “rounds off.” If in fact they jiggered it so that each person receives a check for an identical amount, they have decided either to a) pay a different size bonuses to each person to soothe ruffled feelings (stupid) or b) ignore withholding rules (more stupid).

Livin’ on Tums, Vitamin E and Rogaine

As usual Manhattan, you continue to impress me with your well thought out and logical posts. :slight_smile:

I am prompted to agree with “the Man. . .” bonuses are income, and therefore should be taxed accordingly.

I do have a question though. If your company decides to give a bonus of $200, yet actually give you $220 due to the net of said bonus, then each employee will be having to declare the gross amount and taxed on the 220 not the 200 ( bonus amount) This may not be actually be important in the scheme of things regarding $200 bonuses. However, what about larger sized bonues, given quarterly? If large bonues were given out, and all bosses “tacked on” and increased the gross so that the net would be the actual “bonus amount” technically valued employees could be forced into higher tax brackets due to this “courtesy.” Hell, you have to pay tax on it anyway. Isn’t it easier to have it taken out before you spend it? Double hell, if a person gets a bonus that is so great he/she could be bumped to a higher tax bracket. Screw em! They can afford it.! Sorry, Miller seems to have made my mind meander. I’ll shut up now.

One must learn by doing things; for though you think you know it you have no certainty until you try.

You both bring up good points. I just was shocked that H/R went along with it. I mean to me a $200.00 bonus is before taxes. It suprised me that any company would see it different.

Hey, twenty bucks is twenty bucks! Count it as a win.

And thanx, Ursula! :slight_smile:

Livin’ on Tums, Vitamin E and Rogaine

A company I worked for several years ago used to add a percentage to each person’s bonus (percentage determined by annual salary) that would roughly equal that person’s tax bracket. The bonus is income and the accounting office includes it in your 1099. So I thought it was a very considerate move.

How timely. I just got a $4,500 bonus which, after taxes, came out to a whopping $2,910. I would have rather had a smaller bonus and had less tax taken from it!

“I love God! He’s so deliciously evil!” - Stewie Griffin, Family Guy


You would have honestly been happier if you had gotten say a $3000 bonus which gave you $2100 after taxes? Why? Personally I wouldn’t mind if my taxes were doubled if my salary was increased to the point where my take home pay was higher than when I started.

I am not too sure about the laws and all, but where I work we get “bonus” each year in early December. It is a fixed amount (ie tied to your salary). They tax us at the maximum possible tax rate. With, Fed, State, FICA, and all the total tax is about 45% or so. They do the same with the stock we get each year.

Since I am not in the highest tax bracket, I get a lot of this money back, but it saves me from having to pay a lot. I thought it was a law that they do this but maybe not.


Let’s not confuse the law with company policy. The law (U.S. Federal) is that any income you receive from an employer is taxable – whether base salary or bonus. There is also social security tax (amusingly called “contributions”) up to the ceiling and Medicare tax, paid by both the employee and employer.

The employer must (under most conditions) withhold income tax and social security tax at the time payment is made, whether base salary or bonus.

Employees fill out forms that list the number of dependents, so that employees can choose to have more or less income tax withheld (those forms have no impact on social security contributions.) The employer has very little flexibility in terms of amounts to be withheld, once the employee has made such choices.

OK, that’s tax law.

Now. Companies can choose to pay on either a gross (before tax) or net (after tax) basis. You’ve focused on bonus, but why stop there? How about base salary – the company tells someone that their salary is $30,000. Does that mean they have to pay taxes and so only receive (say) $20,000? or Does that mean that they really get (say) $45,000 and pay taxes so that they have $30,000 left over?

Most companies describe salary and bonus on a gross basis – that is, they describe the amount they are going to pay the employee. That amount is taxable income, and the employees keep whatever is left over after tax. If you are told your salary is $30,000 and your bonus is $3,000 then you will report a total of $33,000 on your income tax form and you may pay (let’s estimate) $11,000 in taxes, so you keep $22,000.

It is very rare for an employer to tell that employee that they will receive a net salary of $22,000. For one thing, it’s a smaller amount, so the company would rather you think of your salary as higher. For another thing, the company doesn’t want to get involved in individual circumstances – “Hey, I have six dependent children and a big mortgage, so my taxes are less than Fred’s, who is single and rents…”

The main situation where an employer commonly communicates a net salary is when a U.S. citizen is being transferred outside the U.S. – very often the company promises a net salary amount, because the foreign taxes may be much higher than U.S. taxes would be, so the communication of a guaranteed net salary is attractive for the person being transferred.

I have never heard of a situation such as described above, where the company said the employees would get a $200 bonus and then said they meant “net” (after tax) rather than “gros” (taxable or before tax.) Sounds like someone made a bonehead move. You should try complaining about your base pay on the same basis – that you were told you’d get $X salary, but you have to pay taxes, so you should get more money so that you hve $X left after taxes. Same principle. See what they say.

On the math – not sure if you’re asking about the math behind how they figure the amount to pay. It’s pretty easy. You want someone to receive $200. You check that the average tax rate for their income level is 20% (say). Then your formula is:

200 / (1 - .20) = $250

Generally speaking,

Net pay / (1-tax rate) = Gross Pay

As the original poster I really don’t care one way or another as I am not eligible for bonuses in my position. It just seemed odd H/R would go along with it.

Hmm… I work for a pretty big employer (US Army), and many people get various kinds of bonuses. All of these are taxable for federal/state income tax, but those paid as a lump sum (at least) are exempt from social Security/Medicare.

Even with these bonuses, most active duty soldiers receive well below 70K/year, so the exemption is not because of exceeding the threshold.

I don’t know if there is some special provision for military bonuses exempting them from social security & Medicare taxation, but I rather doubt it.

I think it has something to do with being an annual or every few years payment, as opposed to a payment that will occur on a recurring basis.

One other possibility is that these bonuses are not automatic; to qualify for a 1 year bonus payment, I have to sign a contract promising to stay on active duty for 1 year from the effective date of the payment. I know that contract payments are sometimes treated differently from “pay”.

Sue from El Paso

Markxx, sorry if I was unclear – I agree with you, it seems very odd that Human Resource Dept went along with that idea.

Sue, I don’t know the details for the Army, there may be special circumstances at play. I will check in the next few days. For civilian employees, however, any payment from the employer is subject to social security tax (up to the ceiling of around $72,000) and to Medicare tax (no ceiling). The form of payment, the conditions, etc are irrelevant – otherwise, companies would structure your total compensation so as to pay less to the government. Tax authorities are sometimes short-sighted, but they ain’t that dumb.

Please note that the situation in other countries could be different, of course.

On an overview – grossing up a bonus is NOT common. Not at all.

Am I missing something here? Who cares what you’re taxed on a bonus? It’s what you’re taxed at the end of the year that matters. If I get a bonus check of $5,000 and the take $4,000 of it in taxes, it might suck that they took 80% of THAT PARTICULAR CHECK in taxes. But all that means is that I’ve paid that much more that will be owed at the end of the year. You’re ultimately only taxed one rate, and over taxing for a bonus check is a safe way of ensuring that every one will have paid enough at years end, because on your regular salary checks you’re taxed on your estimated tax obligation, taking into consideration dependants, etc.

Hey it sucks, but I’d rather get something back at the end of the year, than have to pay Uncle Sam on April 15th at 11:59:59PM.


Kinda depends, Enright, since Uncle Sam pays no interest on the excess withholding… Frankly, I’d rather stick the $4,000 into some interest bearing account for however long a time until April, and then pay out the $4,000 and keep the earnings (after paying tax on that, of course.)

Hang on, Dex. Any interest that money makes between Jan. 1 and April 15 I’d rather keep and pay taxes on next year.

And you’re right. Grossing up a bonus is rare. That’s why I remember the one employer that did it.

Enright, if the bonus comes in December, then no real problem, but if it comes in Jan. then like Dex said, I would rather have all the money and put it in a savings account earning interest. Especially since they take more than they need and I get back a lot at tax time, I would rather me have it than the gov’t. (yes I have adjusted my dependants, but my situation has changed each year and I have not been able to get it down to near zero).