Taxes on Profit Sharing??

[warpaint]

What is the name of your state? Iowa
Our company just informed us today, that they are now going to use a "flat tax" calculation method for figuring Federal and State (IA) withholdings on our bonus and profit sharing checks. They state in their letter to us, that this is mandated by the IRS? I currently claim 4 which means less money taken out for me, but this flat rate is 25%, meaning that I lose 1/4 pay right off the top. How can they just out of the blue, take out more than I stipulated on my W4? I would of course get back any overpayment at tax time, but it puts a heck of a hit on my monthly income. Getting it back at tax time doesn't buy groceries or help pay bills for 11 months of the year? Am I over-reacting? Is this legal and is there a way around it? I also liked getting the letter today 1/14/05, and the "greeting" at the top of the page states "effective January 1st, 2005. Talk about dropping a bombshell on everyone! Any advice or info would certainly be appreciated!!
Thanks so much!!
Douglas

 

[CheeseBlotto]

It's perfectly legal and a very common way to tax bonuses.

 

[pattytx]

This is not "mandated" by law, but is an option that the employer can elect for supplemental wages such as bonuses. It's their choice, not yours.

If you think this will result in your being overwithheld for the year, you can always increase your exemptions on your W-4 so that you will have less tax withheld from your future regular pay. If you claim more than 10 allowances, your employer is required by law to send a copy of that W-4 to the IRS. Here is an IRS publication that can help you, or see your personal accountant.
http://www.irs.ustreas.gov/pub/irs-pdf/p213.pdf

 

[warpaint]

RE: Taxing Bonus checks

Thank you both so much!! Definately something to look into!! So, it is not a "Law", but strictly a choice? Is it easier for them to figure or something? What am I missing, lol. Why or who would want to pay more, just to get it back later? Their famous quote of the day was, "look at it as a savings plan"!!! Sheesh, I can't even afford a real savings plan Don't get me wrong, I love my job, (well, I like my job, lol) and the bonus is awesome, but to lose that much money really irks me!!
Thanks again!!!

 

[pattytx]

The IRS provides several methods for withholding on supplemental wages. Using the supplemental rate is just one of them, but it is the most common. Of course, it's easier to calculate.

The other most common withholding method is to add the supplemental wages to the regular wages for the pay period and taxing them all per the
W-4. It is not an IRS-accepted method to issue a separate check and tax
per the W-4 without considering the previous pay.

This may be a disadvantage to you, but it may not be to another employee.
Depending upon your salary, amount of bonus, W-4 status, personal tax situation, 25% may not be enough. It makes no sense for an employer to calculate the tax on bonuses based on "what is best" for an individual employee. The employer just doesn't know everyone's personal situation.

Get over it. It's perfectly legal. As I previously posted, you can always adjust your W-4 for future pay so less is withheld.

 

[warpaint]

Hi Patty! Thanks again, you seem like a genious!! I don't know what you do in small town TX, but you are very knowledgable, and I appreciate your help! First, Is there a place for a person like myself to see these laws or methods on-line? Secondly, you wrote..... "It is not an IRS-accepted method to issue a separate check and tax per the W-4 without considering the previous pay",.......Does this mean that they could actually add it to my weekly wages for that period and use the W4 info, and, does " not an IRS-accepted method " mean they are wrong for cutting two checks or am I reading it to my advantage, lol? " The employer just doesn't know everyone's personal situation. ", Isn't that what the W4 is for?, so they know my personal situation? Isn't it all figured by a computer anyways, once W4 info is entered in for each employee, it just figures their pay accordingly? And finally, I could get over it much easier if I were single and didn't have 3 mouths to feed plus myself. We homeschool our 2 boys and suffer financially not having my wifes income anymore, but it is a sacrifice of our own choosing. To wake up one morning, go to work, and find out your going to have $150 to $200 less a month, is quite disturbing, but as you said, what may be bad for me isn't necessarily bad for others. But anyways, thank you again!! With all my problems and your brilliance and knowledge, we could solve alot of injustices, lol, and I really, honestly, in-truly still think this stinks!!
Have a great day
Douglas

 

[pattytx]

I have been in payroll for over 25 years and am a Certified Payroll Professional (for which you have to take a test and have continuing education in the discipline).

Wow, lots of questions:

1. You can go to http://www.irs.gov and search in Forms and Publications for Publication 15, Employer's Tax Guide, and look under the section for Withholding.

2. Yes, they could add the bonus to your regular pay and tax the entire amount per your W-4. However, that method could result in a higher marginal tax bracket for withholding than 25%. For example, at M-3, let's say you have biweekly taxable wages of $1,000 (net of pre-tax benefits and 401K contributions). Simplistically speaking, if your total pay for that period was around $4,000 (including the bonus) you would be in a 25% marginal tax bracket. If more, it could go to 28%, 33%, 35% or even 38%. But your company has opted not to use this method.

3. They would not be wrong to issue a separate check necessarily. However, if they taxed the bonus check per your W-4 as though it were the only pay for that pay period , then that would be wrong. If the supplemental rate is not used, then the accepted method would be as follows: a) Figure the tax on the entire amount (both bonus and regular pay) as though it were a single payment b) subtract what was withheld on the regular check c) withhold the difference from the bonus check. So you can see, issuing a separate check without using the supplemental rate would be the same as paying them together and not using the supplemental rate. If they were issuing a separate check in prior years and not calculating it that way (and not using the supplement rate), either they figured it out or someone told them it was incorrect. They are now correcting that by using the supplemental rate.

3. No, they don't know your personal situation. All they know is what you put on your W-4, which first of all, does not necessarily represent what you can claim on your 1040. They do not know that your spouse doesn't work. They do not know that you choose to put your children in private school or any other expenses you may have. They do not know if you have taxable investments which may increase your income. They do not know if you have a business on the side. Exemptions on the W-4 may be increased or decreased based on many factors. For example, I claim Single-3, although I have no children, but I do own a home for which I can deduct the interest on my 1040, so I have increased my W-4 exemptions to account for the write-off and not be overwithheld, which I would be at Single-0 or Single-1. Another example would be if your spouse works; each of your taxable wages separately could be in one marginal tax bracket for withholding purposes, however when the two are added together, the total results in a higher marginal tax bracket for tax liability purposes; in that case, one spouse would lower their exemptions so they together would not be substantially underwithheld. And yes, most companies now use payroll systems with the tax calculations tablized. So what?

4. If you think it stinks so much then (and I'm saying this to you for the third time) get the brochure from the IRS I've referenced or see your accountant regarding revising your W-4. If the 25% withholding on the bonus will put you in an overwithheld position for the year, you are allowed to increase the exemptions on your W-4 to account for that, which will result in less withholding from future pay and more net pay in your check. Note, however, that the employer is prohibited by IRS regulations from accepting a W-4 that states a flat dollar amount or percentage for withholding.

I'm not trying to be mean here, but you keep complaining about something that the company has done that is perfectly legal, while you refuse to take the action (a revised W-4) to mitigate the consequences of that decision. There is something you can do; if you choose not to at least investigate a revised W-4, you have no cause to beat the dead horse.

 

[warpaint]

I do fully intend to follow your suggestion on the revising of my W4, that sounds super!! But, you will have to pardon my "whining", I got this letter yesterday morning, came home last night, searched for answers for hours, and then found you, lol. (lucky you, huh?) All of your input is fantastic, and honestly has answered everything I wanted to know, but I now have 48 hours to ponder it, until I go in Monday and make the changes to my W4 per your reference. Please don't think I was ignoring your " THREE " suggestions, lol. I was merely trying to fully grasp the whole concept of what you were saying. You see, I don't have all them there book smarts that you do, so that's why the good Lord made people like you to help explain these things to people like me!! It's been great posting with you and you truly are an asset to folks like me, but...........and I'm not trying to be mean either, (lol), but three posts isn't beating a dead horse. If we are still chatting about this next month, then I will concur. Maybe they have a course on Patience down there, lol. Seriously though, your super and have been a great help, do you have a retainer fee, you would be quite handy to have around, (other than that lack of patience thing) lol!!!
So, your saying I could possibly claim say........6 or 8 and file only 4, or whatever my tax person says huh? Does H&R B. answer those questions free I wonder? They have done my taxes forever.
Have a super day~
Doug

 

[pattytx]

If you have a relationship with H&R Block, they often offer this service for free.

And yes, everyone on this board is a volunteer in addition to their true job, so you could possibly understand that we get a little short-tempered when we feel our advice is being discounted or ignored and we feel like we are repeating ourselves.

Actually, if your payroll dept. was any good, they should have been able to explain all of this to you.

Ah, well, maybe they're not as good as me!

 

[warpaint]

I think you hit it on the head! They're not as good as you! Pretty sad that I can spend a few minutes with you and feel like I at least have an option, but my employer chooses to stuff it in our paycheck envelope, with no warning, no concern, and no alternative other than "this is the old way": $45 , "this is the new way": $125 . You've been very comforting, once we got passed that whole "you being mean thing", lol. I can fully understand being short-tempered, especially when your doing it for free after a days work. Anyways my dear, if you EVER need help or have a question about hunting or fishing, NFL Football, old and new music, old movies, automobile repair, gardening and yes, even cooking, I am here for you!!
Thank you, and who knows, maybe they will shaft me again someday soon and we can have another visit! (I should have said "legally" shaft me, wouldn't want you to think I didn't learn something, lol)
Doug