Author Topic: Question re business payroll tax (no legal advice, just curious!)  (Read 688 times)

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Hillia

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DH has a friend who was recently given a bonus in lieu of a raise.  Friend is an hourly worker, non-exempt (so he gets overtime).  Instead of giving him, say, 50 cents an hour raise, they gave him a bonus of 50 cents x 2080 (the standard number of hours a full time employee works in a year).  This does keep the company from having to pay him a higher overtime rate, but that department gets maybe 50 hours of overtime a year (if that), so that doesn't seem like a major issue.  I'm thinking that bonuses are somehow taxed differently than regular wages from the employer's perspective; does anyone out there know?  We're just idly curious - it seems like an odd way of doing things.

(Thinking about it, it freezes his base rate, so future 'percent' raises will remain at the current rate.  That could be it also.)

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Tea Drinker

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Re: Question re business payroll tax (no legal advice, just curious!)
« Reply #1 on: November 19, 2014, 07:21:41 PM »
Bonuses generally count as part of annual salary. This means your friend will get less money than he's expecting in that paycheck, because the tax rate for that paycheck is calculated as if he was getting that much every paycheck. (So, instead of calculating it based an increase of $1000/year, taxes will be deducted as if he'd gotten a $24,000, or $26,000, or $52,000/year raise.) That in turn means he's likely to get a refund when he files his taxes for this year, but if he was thinking "what will I do with the extra thousand dollars," he may be unpleasantly surprised when it's only half that.

In other words, it looks like a different tax rate for this check, but when he looks at the numbers for the full year, it's the same tax rate.
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greencat

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Re: Question re business payroll tax (no legal advice, just curious!)
« Reply #2 on: November 19, 2014, 07:25:45 PM »
Also, instead of a 50 cent raise giving him $20 more a week, this gives him a lump sum of about $1000.

PastryGoddess

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Re: Question re business payroll tax (no legal advice, just curious!)
« Reply #3 on: November 19, 2014, 07:25:58 PM »
Bonuses and raises are two separate things.  A bonus is 1 time, a raise is permanent (for the most part).  Also just because you get a bonus doesn't mean that you get a raise. 

I think you're focusing on how the bonus was calculated.  There is no right or wrong way to calculate a bonus since it's not part of the regular compensation.  This may just be the company's way of deciding how much of a bonus to give.  But the amount they give is up to them.

shhh its me

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Re: Question re business payroll tax (no legal advice, just curious!)
« Reply #4 on: November 19, 2014, 07:51:25 PM »
Bonuses generally count as part of annual salary. This means your friend will get less money than he's expecting in that paycheck, because the tax rate for that paycheck is calculated as if he was getting that much every paycheck. (So, instead of calculating it based an increase of $1000/year, taxes will be deducted as if he'd gotten a $24,000, or $26,000, or $52,000/year raise.) That in turn means he's likely to get a refund when he files his taxes for this year, but if he was thinking "what will I do with the extra thousand dollars," he may be unpleasantly surprised when it's only half that.

In other words, it looks like a different tax rate for this check, but when he looks at the numbers for the full year, it's the same tax rate.

They don't have to do it that way , you can calculate taxes based on multiple pay time frames ie weekly , bi weekly , monthly quarterly and calculate the rate correctly. They could also make the opposite error ...ie tax the bonus as if it was his entire monthly or weekly income.  IT just depends on how good the bookkeeper is.

Since you seem to be curious as to why a company would do a one time time bonus rather then a raise......

I do think bonus may be excluded from things like workman comp and unemployment insurance, but I'm not sure.  Also if they gave a raise they would be very unlikely to lower their pay next year so a one time bonus is less of a commitment. If the bonus is paid at the end of the year to company gets to keep the money all year. It could also be the that the company has a pay rise freeze.


JoW

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Re: Question re business payroll tax (no legal advice, just curious!)
« Reply #5 on: November 19, 2014, 10:34:22 PM »
For a company the advantage to giving a bonus instead of a raise is that the bonus doesn't have to be paid again next year.  That can come in handy if the company's income is unpredictable.

TootsNYC

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Re: Question re business payroll tax (no legal advice, just curious!)
« Reply #6 on: November 19, 2014, 11:27:34 PM »
Especially at low wages, a raise just doesn't look that great once you take taxes out. In the U.S., lower-wage earners send about 1/3 of their salary to various taxes.


So, at 50 a week, that's a $20 raise; minus $7, so $13. Not a lot each time.

But a yearly bonus for him will be a take-home of $728. Which is going to feel like more money?

If I wanted to make a specific employee feel good, that's what I'd do--give him a bonus.

Now, take-home of a bonus may actually be smaller, because there's some wonkiness w/ being in the same tax bracket but a larger amount. So he may take home $600. But that will still feel like a lot more than $13 a week. Even if it's about the same, mathematically.

People piddle away $13 easily. But $600 will buy something specific.

LadyDyani

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Re: Question re business payroll tax (no legal advice, just curious!)
« Reply #7 on: Yesterday at 09:01:55 AM »
Also, the company could have hit the end of the year, realized they made more than they thought they would, and decided to share the wealth, as well as lower the amount they'll pay taxes on come January.
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wolfie

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Re: Question re business payroll tax (no legal advice, just curious!)
« Reply #8 on: Yesterday at 09:39:02 AM »
Especially at low wages, a raise just doesn't look that great once you take taxes out. In the U.S., lower-wage earners send about 1/3 of their salary to various taxes.


So, at 50 a week, that's a $20 raise; minus $7, so $13. Not a lot each time.

But a yearly bonus for him will be a take-home of $728. Which is going to feel like more money?

If I wanted to make a specific employee feel good, that's what I'd do--give him a bonus.

Now, take-home of a bonus may actually be smaller, because there's some wonkiness w/ being in the same tax bracket but a larger amount. So he may take home $600. But that will still feel like a lot more than $13 a week. Even if it's about the same, mathematically.

People piddle away $13 easily. But $600 will buy something specific.

Sure but the $13 will be there the entire time I am at the company whereas the $600 is a one time only thing. Plus it means I have a higher salary for other raises and it means that I am not losing money because of cost of living going up.

TootsNYC

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Re: Question re business payroll tax (no legal advice, just curious!)
« Reply #9 on: Yesterday at 11:03:07 AM »
Which is also part of why it's a bonus--because then it won't be there for your next raise to be based on.

wolfie

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Re: Question re business payroll tax (no legal advice, just curious!)
« Reply #10 on: Yesterday at 11:05:52 AM »
Which is also part of why it's a bonus--because then it won't be there for your next raise to be based on.

Right - which is why I would rather have the raise instead of the bonus.

Hmmmmm

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Re: Question re business payroll tax (no legal advice, just curious!)
« Reply #11 on: Yesterday at 12:23:04 PM »
In my company, a bonus in lieu of an annual raise is given when the person is nearing the top of their pay range for the job they are doing. It allows them an increase but doesn't end up pricing them out of the job market in a few years.

So for example if the hourly range for my job was between $17 & $22 per hour and I  make $20 an hour and received a 5% raise, my hourly rate would become $21. Then the next year if I again received a 5% raise I'd already be out of the salary range for my job.

I see it most often when someone has been in the same job role for 7 plus years with no potential to increase their responsibility to allow them to be promoted to a higher pay grade.


pierrotlunaire0

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Years ago, when I was the payroll person, I worked for a company which employed sales reps (lots of bonuses) and service techs (Lots of overtime).  My IRS tax guide out lined several different ways to calculate withholding (treating the bonus as if a regular biweekly paycheck, combining bonus and regular paycheck together and taxing as if this were a biweekly paycheck, and so forth).

The bottom line: at the end of the year, the total annual withholding should be close (no more than 5% off, I think) to what it would have been had the employee been paid one large annual paycheck, and the IRS thoughtfully included an annual chart.

This requires careful monitoring on the part of the employer, but the IRS wants the end result to balance.  Also if the end result is way off (not enough or too much withheld from the variance allowed), the IRS holds the employer liable.
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