January 23, 2015
What is the withholding on overtime pay and bonuses. What is that money ultimately taxed at? Explain?
What is the withholding on overtime pay and bonuses. What is that money ultimately taxed at? Explain?
The withholdings and bonus pay is withheld at a greater rate because they are amusing that you will end up paying more money on your taxes because you are making more then you planned on. You however do not pay any more taxes on the overtime then you would have if you had made the same amount of money working normally, the gov doesnt distinguish from overtime pay to normal pay when looking at your gross income. So if you make $35,000 working normally and get $5,000 from overtime and bonuses you will pay income taxes on $40,000 as if you had earned the $40,000 working normally at a job that paid $40,000 a year. So dont get caught up in people saying you pay extra taxes on overtime, you do in the long run just because you made more money, not because its overtime.
Bonuses and overtime pay are calculated in the same manner as regular wages. Payroll taxes are calculated on a graduated scaled meaning the more you make the higher percentage is taken out. Ultimately the your money is taxed at a level that is commensurate to your annual taxable income. For hourly employees and salaried employees who get bonuses, this number can only be estimated throughout the year. It is not until the end if the year when filing your taxes can you determine what rate your money is taxed at. Once you are able to determine your taxable income, you can look that number up in an IRS table to determine the rate bracket you are in and can calculate your tax liability. Then you can calculate your effective tax rate or average tax rate, which is the taxes owed divided by your total income and taxes owed divided by taxable income respectively.
Well said, gentlemen. Let’s review.
(1) In most cases, taxes are withheld on your bonus money and overtime pay at the 25% tax rate (the employer has more than one option, but this is the simple method).
(2) That withholding has nothing to do with what you are ultimately going to pay in taxes (your effective tax rate).
(3) The withholding is higher because you are projected to make more for the year beyond your normal wages and this protects you from underreporting income and it protects the government from not getting the taxes that are due.
(4) Higher withholding on bonus pay and overtime may or may not put you in a higher tax bracket. Don’t worry about that. Focus on your overall tax paid (effective tax rate) as you work at reducing your yearly tax bill.
(5) One of the easiest ways to do this and most effective, is to automatically save and invest your earnings into your traditional retirement plan at work (401(k), 403(b), TSP, and 457. Go!