Say there is a flat income tax rate of 10% for the purposes of this question to keep it simple.
Scenario 1: I win $100,000 even from the lotto. There would be $10k in taxes due. Say the state ran a lotto where they pay the taxes on it so you actually end up with $100k take home. This means, technically, you win $110k. For purposes of tax liability so you actually owe $11k in taxes now since you are actually receiving $110 instead of $100k? So you would only take home $99k?
Scenario 2: Same idea as the first but you get left $100k by your dead gramps but he says in his will he’s covering the tax bill so you can have $100k take home. Are you now on the hook for $11k on taxes?
Scenario 3: Casino. Same idea but house pays your tax bill.
Bottom line: if someone pays your tax bill are you technically liable for taxes on that tax bill since you were given money to pay it off?
You’re talking about “grossing up”. If I undertake to pay you an amount which, after tax, will net you $100, and the applicable tax rate is 10%, what I have to pay is not:
$100 x 110%= $110
but rather:
$100 x (1/0.9) = $111.11
In plain English, you will only get 90% of what I pay out. Therefore I must pay out a number, 90% of which is $100. That number is $111.11 (to the nearest cent).
In plainer English, I gross up the amount I pay out so that you will receive, after tax, $100.
If I only pay out $110 you will, in fact, only net $99, and I will be in breach of my commitment to ensure that you net $100. The outcome is not necessarily that you will have to pay an extra dollar; you could alternatively sue me to make me honour the commitment I made, and pay out the missing $1.11.
state lottery: The state doesn’t charge you any state income tax, which is very different from them paying the state income tax for you. Therefore the federal tax is only based on the $100k that you actually won.
I go through this with end of year (aka xmas) bonuses. I want to give, say, $300 as a bonus. I have to figure out the amount that leaves $300 after taxes.
Wow. I am shocked. Totally surprised. I really thought that the states exempted lottery winnings, just like the earnings on their bonds and such. I had to go to the lottery websites to be sure. I’m still in shock…
They don’t know the employees marginal tax rate, that is only really determined when an individual files their taxes.
But they do know their payroll tax rate. For bonuses, just like with regular pay, they have complex formulas, with differences for withholding level, that the payroll system applies to earnings. For bonuses specifically, the payroll has options to apply the “regular” tax rate, or a special tax rate. The “regular” tax rate (roughly) takes what one has been paid so far that year, adds the new pay (bonus), annuallizes it, and figures out the tax percent based on the payroll tax table formulas. Whereas the special tax rate is a flat percent that ignores the earnings year-to-date.
Isn’t the difference in prizes more a function of population? For instance, Canada doesn’t tax winnings, and had roughly 1/10 the population of the US.
Assuming participation rates are the same, the pool for winnings in Canadian lotteries will be roughly 1/10 the pool force innings in the US lotteries.
No.I took the business checkbook and looked at what each person was paid, gross and net. I then tried to determine the amount I needed to come up with the desired bonus, taking the same percentage out.
The accountant never complained, so I guess I wasn’t too far off.
If you’re using payroll tax software, you click on the settings for married, single, etc. and how many exemptions (from the employee’s W4 form) then you put in the gross wages and it automatically calculate all the deductions such as federal withholding, state withholding, social security tax, medicare tax, state unemployment tax, and it comes up with the net wages. So, you put in gross wages $1,600.00 and it comes up with net wages of $1,318.22 or something. But the software also has an option that if you want the net to be exactly $1,600.00 then you can enter that and it calculates what the gross would have to be and it tells you the gross needs to be $1,942.01 or whatever.
But if you’re figuring the payroll by hand it’s a laborious process because you have to estimate and then see how it comes out and then you guess too high or too low so you have to adjust your estimate several times. I use a spreadsheet for my payroll. If I want it to come out to a round number I just keep entering gross amounts until the net looks right, takes me about 30 seconds because the spreadsheet recalculates automatically each time.
I’m sure the lottery office has computer software to do it for them.
Of course, there’s no guarantee that this actually results in zero tax liability because they don’t know how much you give to charity or how much your mortgage deduction is or whether you plan on itemizing at all, etc. All they know is what’s on your W4 form: your filing status and your number of exemptions. So they follow the formulas for withholding based on that information and usually it ends up that most people have had too much taken out and they get a small refund next April 15th.
I think the OP is confusing income tax with withholding requirements.
If the lottery gives you $100K, and there’s a 10% tax rate, then you owe $10K to the government. If they give you $110K, and there’s a 10% tax rate, then you owe $11K to the government.
There may be a requirement that the lottery withhold taxes on your behalf and send it into the government directly, but that’s still you paying the income tax. So, let’s say the lottery is required to withhold 10% and send it into the government. If they wanted to make sure that you had 100K at the end, then they would need to pay you 111,111.11, but withhold $11,111.11 of that and send that into the government. That way you still get $100K in your hand. But again, the total amount is what counts as income, not just the amount you get in your hand.
Now, let’s try a different scenario. Let’s say that you have to pay a 10% tax on any gift I give you, and I give you a $100K vase. In this case, I can’t withhold 10% of a vase to send to the government. Instead, what I could do is give you the vase and “give” you an additional $11,111.11 to cover the taxes. But, I’m not actually going to give you the cash. I’m going to withhold it and send it into the government. That way, you get the entire vase and the taxes on the vase covered, but you never see any of the cash. However, the entire amount of $111,111.11 is what I actually gave you.
In real life, taxes are far more complicated than this.