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End of the year bonus - quick tax question! Pls help.

Sid23

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Aug 9, 2007
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I'm a fulltime W-2 wage earner with no side businesses, real estate or other write offs. I usually receive a tax return refund of about $1,500, give or take.

I'm going to be receiving a bonus in the next couple days, and my boss has asked if I'd rather take the bonus without the taxes taken out and deal with them myself. Or, I can receive the bonus with taxes already taken out.

Last year, I received the bonus with taxes taken out, so I only received $5,700 out of my $10,000 bonus.

I'm thinking this year will be at least $10k, possibly more, so maybe I should take the money up front and figure out how to deal with the taxes later?

Has anyone ever dealt with this before?

(sorry if this is a slowlane topic)
 

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JScott

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Disclaimer: I'm no tax expert! :)

While your situation may be more or less complicated based on things like last year's taxes, over-payments this year, etc, I believe that you are required to pay estimated quarterly tax within 15 days of the end of the quarter where you earned it. So, if your boss doesn't take taxes out for you, you'll be required to do it yourself prior to January 15, 2008 (using form 1040-ES).

Potentially, doing it yourself, you could save a some money on your bonus taxes in December (if it would otherwise cause you to over-pay this year), but you need to decide if it's worth the extra effort when you'd be getting that (likely small amount of) money back in a couple months anyway.

Disclaimer: I'm still no tax expert! :)
 

Diane Kennedy

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Aug 31, 2007
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I'm a fulltime W-2 wage earner with no side businesses, real estate or other write offs. I usually receive a tax return refund of about $1,500, give or take.

I'm going to be receiving a bonus in the next couple days, and my boss has asked if I'd rather take the bonus without the taxes taken out and deal with them myself. Or, I can receive the bonus with taxes already taken out.

Last year, I received the bonus with taxes taken out, so I only received $5,700 out of my $10,000 bonus.

I'm thinking this year will be at least $10k, possibly more, so maybe I should take the money up front and figure out how to deal with the taxes later?

Has anyone ever dealt with this before?

(sorry if this is a slowlane topic)
I am a CPA, but don't have all the details - so disclaimer, disclaimer, disclaimer

Do a quick estimate of how much in taxes you'll owe. If you've paid in enough already then don't overpay (why wait for your money?), if you haven't then tell your boss exactly how much you want withheld.

And then thank your boss for letting you have a choice - that was very thoughtful. :)
 
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Sid23

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Aug 9, 2007
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Do a quick estimate of how much in taxes you'll owe.
Diane, thank you for the response! I was hoping you'd chime in here.

Is there a quick and easy way to estimate taxes owed? I have my last paystub here...
 

JScott

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Diane, thank you for the response! I was hoping you'd chime in here.

Is there a quick and easy way to estimate taxes owed? I have my last paystub here...
Yeah, I had a feeling that was going to be a follow-up question, which is why I suggested just paying it now...better to overpay for 3 months than to underpay... :)

I'm guessing the best way to estimate (barring having an accountant look at your info) is to grab a copy of TurboTax from 2006 and run the numbers...
 
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Sid23

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Yeah, I had a feeling that was going to be a follow-up question, which is why I suggested just paying it now...better to overpay for 3 months than to underpay... :)
Jscott, so you are saying the amount of taxes paid won't change, it's simply in the timing of when I would have the funds? (i.e. I get $2k back, either by withholding it from the bonus OR waiting until I get my refund in a few months?)

I know this is elementary...I'm not finished with TaxLoopholes yet! (but I'm getting there...)
 

JScott

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Correct, the amount of tax you owe will not change. Stepping back to the basics (sorry if this is obvious, but from your question, I wasn't sure)...

The way it works is, at the end of the year, after all your income/deductions for the entire year are tallied, you will owe a certain amount of tax to the government.

Now, instead of the government waiting until the end of the year to collect this money, they require you to pay it throughout the year. To ensure you do this, your company will deduct a percentage of your salary each pay check for taxes. The amount they deduct will depend on how much they *think* you will end up owing at the end of the year (which is based on your salary, your anticipated bonuses, how many deductions you claim on your W4, etc). Likewise, when you get other income (like cashing in stock options, for example), the financial institutions will often withhold part of your money to pay taxes. This way the government can be sure that it will get their cut and they don't have to wait until the end of the year.

Unfortunately, because you company (and the other financial institutions that pay you money) don't know exactly how much tax you'll owe at the end of the year, they don't know exactly how much to deduct. They might deduct too much; they might deduct too little.

When you got your $1500 refund last year, it wasn't because you did anything special, it was just because your company took too much money out of your paycheck throughout the year. Had they taken less, you would have gotten a smaller refund. Had they taken more, you would have gotten a bigger refund. So, while that $1500 refund seemed like a good thing, it's really a bad thing -- the government took more of your money than they deserved, and they got to collect interest on it instead of you getting to collect interest on it.

Problems occur when your company takes too little for taxes (in which case you owe money at tax time and you might have to pay a penalty) or when they take too much for taxes (in which case the government gets to hold your money until you file and get your refund, just like is happening with the $1500 each year).

Does that make sense?

So, getting back to your bonus situation, if the company withholds money for taxes, they will withhold the amount they think is right. Historically, they've withheld too much (about $1500 too much throughout the whole year). So, what Diane was suggesting was that if you think they will withhold $1500 too much this year, that you tell them to take out $1500 less in taxes from this bonus than they otherwise would. Instead of that $1500 going to the government (and you getting back as a tax refund) it would go right to you now.

The problem with this is that unless you are sure that your company has withheld $1500 too much from you this year, telling them to give you an extra $1500 from your bonus is dangerous. For example, let's say that the company has only withheld an extra $1000 from you this year (their estimates were better than last year), and you have them give you that $1500 from your bonus taxes. When you file your taxes next year, you'll find that you underpaid for the year by $500 (the $1500 they didn't pay on your bonus minus the $1000 too much your company took), and you'll owe that to the government for taxes.

Does that make sense?
 
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Sid23

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Aug 9, 2007
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Jscott,

Thank you for this. Wonderful explanation and yes, it all makes sense. I see the downside in not having the taxes deducted from the bonus...

rep speed ++

I'll probably just go ahead and have the taxes taken out. Granted, I see how I'm giving the loan to the gov't, but I'll file my return as soon as I get my W-2 and get the money back.

At this stage, I'm not losing "that much" by waiting a couple of months for the money...

Thanks again. I really appreciate the explanation.
 
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