You are correct that you don’t see the employer’s portion of payroll taxes, and that they apply to compensation paid as a bonus, but you are incorrect if you believe that is why your after-tax bonus is less. The employer still bears that cost, not the employee. Of course that is semantics, but it answers teh specific question why the check is so small.
In other words, its the same withholding amounts as with your regular check.
I never worry about this. If they overwithhold, I get it back when I file my tax return.
Also, things like your 401k, cafeteria plan, and medicare tax have cielings to them. For example, there is no medicare tax after $80,000, and you can only contribute $12,000 or $13000 this year to a 401K. So if you get a bonus and they withhold these items from your bonus it just means you hit your cielings earlier in the year and you end of year paychecks will have less withheld.
I think a lot of people have talked around “how” the taxes are computed at the higher rate, but IIRC from my previous life as a CPA the “why” bonuses are taxed so steeply is pretty straightforward:
If things are working properly (ie, you are monitoring your withholding rate well by estimating your tax burden in light of your likely deductions) your regular paycheck is taxed at or near your effective tax rate–the percentage of your gross income that you will ultimately owe the government. So if your effective tax rate is 20%, 20% should be coming out of your paycheck each period. If you make $52,000 a year, each weekly check should get dinged for $200 of taxes.
Your bonus, however, will be taxed at your marginal tax rate–not the average tax rate for the year, but the tax rate of the last dollars you made that year. Using the above example, the taxes on dollars above $52,000 will be taxed at a higher rate than the 20% the first $52,000 got whacked at.
The reason the last dollars in are taxed higher is because of the progressive nature of our tax structure–the more you make, the higher your average tax rate. To make that work, the concept of “tax brackets” kicks in and taxes each successively higher chunk of income at a higher marginal rate. So your first $10,000 of income are taxed lightly, if at all. Your last dollars of income are taxed at a much higher rate.
So all Uncle Sam is trying to do is tax your bonus high enough to reflect your marginal tax rate, so that you don’t accidentally loan the government money/owe them cash at tax time.
For a quick calculator on marginal and effective tax rates:
Hesitant though I am to argue with a former CPA, I don’t think your explanation is correct, Rubicon. Under your explanation, the bonus is being taxed correctly (but at a higher percentage rate than the average of the paycheck, i.e. at the marginal rate).
Other posters have explained why the bonus is actually being overtaxed. Using your example, if someone gets an extra $1,000 one week, it is not that the extra $1k is taxed at the marginal rate for $52k. The issue is that the withholding system looks at the paycheck of $2k for one week, multiplies it by 52 to get an annual rate, and taxes the extra as if the person earns $104k per year. So the first part of the bonus may be taxed at the person’s marginal tax rate, but the rest of it can be pushed into even higher tax rates.
At the end of the year, when you submit the tax return it becomes clear that the extra $1k should only have been taxed at the marginal rate present at $52k, so the amount extra taken at higher tax rates is eligible for refunding.