Is tax on a bonus really 40% (please say no)?

NO. It’s just taxed as income.

What are the tax laws where you live? We don’t know and can’t tell you. Where I live, bonus income is taxed at 28% by the federal government, and some by the state too.

If you’re In the UK, any income over 39k is taxed at 40%, bonus or not!

It shouldn’t be taxable at anything more than your tax rate for the year. It will most likely be reported on your W-2 as regular income.

The reason people tell you to subtract 40% is because most payroll systems compute your tax withholding on each paycheck, based on your total pay for that period, annualized. Make sense? So, when you get your bonus, the payroll system thinks that’s your normal pay, and taxes you as though you make that much all the time. I’ve always found that for my bonuses, the amount is more like 35% subtracted from the bonus, to estimate how much I’ll actually see in my check.

In any event, you should get a bunch of that tax back next year (or it will go to other things that you owe tax on).

I live in Seattle Washington

@OreetCocker that sounds bad at first, but don’t you get a lot of social programs and health care in return or do you just hate it?

From Here at the irs.gov site

7. Supplemental Wages

Supplemental wages are compensation paid in addition to an employee’s regular wages. They include, but are not limited to, bonuses, commissions, overtime pay, payments for accumulated sick leave, severance pay, awards, prizes, back pay, retroactive pay increases, and payments for nondeductible moving expenses. Other payments subject to the supplemental wage rules include taxable fringe benefits and expense allowances paid under a nonaccountable plan. How you withhold on supplemental wages depends on whether the supplemental payment is identified as a separate payment from regular wages. See Regulations section 31.3402(g)-1 for additional guidance for wages paid after January 1, 2007. Also see Revenue Ruling 2008–29, 2008–24 I.R.B. 1149, available at
www.irs.gov/irb/2008-24_IRB/ar08.html.

It’s not quite so bad if you live in a state without income tax.

I’m with @nope . The payroll system ASSUMES that you will make that much money for the given time period for balance of year, therefore Normal salary plus bonus equals huge money.
Ten percent bonus for previous quarter equals 1.3 weeks plus regular pay. So if you are paid twice a month new pay check is about 2 weeks plus 1.3 weeks ==> pay raise of 65 % one week only but payroll calculates on this amount.

I think I got it…

If I take the gross amount from my bonus payout, multiply it by 52 (bi-monthly paydays) then take the hypothetical yearly income and apply the percentage stated in the 2010 federal withholding tables (page 39) I would have found the approximate percentage withheld.

I’m pretty sure I just figured it out, not sure if I explained my process well though. Thanks for you help everyone!

Only for people flaunting around in robes.

@liminal you know nothing of my work ;-)

@drClaw :)

@drClaw Exactly.

Laureth is spot on. Standard minimum withholding on a bonus is 28% for Federal tax. There is no income tax in the state where Drclaw lives so that is not a factor.
I have used ADP and BBT payroll services (major player in the Southeast) and in the absence of anything else AND if the payment is coded as a bonus on a separate pay line, they will apply 28%.

What we are all overlooking are the mandatory withholdings of Social Security at 6.20% and Medicare at 1.45%. Social Security does top out eventually but at this point in the year most of us are still paying social security, no matter how big the bonus is.

Take 7.65% for payroll taxes, 28% for Federal tax and for example 7.75% top rate here in North Carolina and you end up in the 40% range.

SRM

@srmorgan Yeah, those are great points, and don’t forget that if a person contributes to his or her 401(k) plan, that will come out as well!

In Germany it’s the same as for base salary. The percentage depends on the yearly total of base salary plus bonus.

@nope

that is a good point. The 401k deferral will lower net pay as well as lower the taxable income on which the Federal income withholding (and State if there is an income tax where you live. There is no income tax where the OP resides).

If the OP wants to do it, some 401k plans will allow an extra deferral on a non-recurring payment. For example, say you are contributing 4%, aside from contributing 4% of the bonus payment, you could say take it to 10% for the bonus payment.
Not every plan is going to allow this. It depends on how the plan document is structured.

But @nope , that was a good call.

SRM

@drClaw yep and a pension aswell allegedly but am sure the cupboard will be bare when retirement comes around :-)