AboutMike Wellman Expertise I was a former Manager with Price Waterhouse, now PricewaterhouseCoopers, the largest accounting firm in the world. I have had clients in almost every industry and of every size.
I will only answer questions dealing with IRS problems such as delinquent tax returns, Offers in Compromise (Tax Settlement), IRS collection matters including installment agreements, liens, levies, seizures, audits, appeals, innocent spouse claims and injured spouse claims. All other will be referred to the question pool.
Experience Over 25 years experience in taxation specializing in IRS collections, examinations and appeals.
Publications New York Times, Wall Street Journal, Your Money.
Education/Credentials BBA, Baylor University.
Awards and Honors IRSOS.com won the Knowledgeweb award for educational excellence for content.
Expert: Mike Wellman Date: 4/11/2008 Subject: Bonus
Question QUESTION: What does the tax law say about how bonuses must be paid and taxed. For example is a single bonus check treated differently that a bonus that is included in your regular paycheck? What is the bonus is paid over several regular checks or is this just "several bonuses"?
ANSWER: A bonus is taxed just like regular salary. The problem comes in when you get a bonus in large lump sum. The payroll system assumes that you are paid that amount all year.
For example, assume you are paid $3,000 per month and you are paid twice a month. Your withholding is based on receiving $1,500 per pay period. Then assume you get a $10,000 bonus at the end of the year. You are now getting paid $11,500 for that one pay period and the payroll system assumes you now get paid $299,000 a year and withholds accordingly - vastly over withholding for the year now.
The solution is for your employer to make a manual adjustment to the withholding to change it to a flat 20% of the bonus plus your normal withholding on the $1,500.
Of course had you been paid the bonus evenly throughout the year, the problem would never exist.
---------- FOLLOW-UP ----------
QUESTION: So as I understand the answer - it is better to get a bonus spread out over several checks to reduce the tax bite if the company does not want to manually adjust the withholding - is this correct?
Can the company give the bonus check without taxes and gross it up at the end of the year?
Answer If they will not make a manual adjustment than yes, spreading it out is better. They cannot pay it without withholding taxes without exposing themselves to potential problems. Grossing it up at the end of the year is a lot more trouble than the 30 seconds it would take to make a manual adjustment to the withholding.
