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A Very Taxing Bonus

Shocking! Outrageous!

I'm relatively ignorant about taxes. This is a deliberate decision — it's depressing to educate myself about taxes. I don't want to deal with it. Not at all. Not even with software. Every year I gather my paperwork and drop it off at H&R Block, and let them deal with it.

Yet I still retain a morbid curiosity.

Today I received a bonus check. (Not because I'm special, it's a standard part of total compensation.) I read somewhere, painfully, that bonuses have taxes withheld at higher rates than ordinary wages. I decided to look at the numbers and was shocked and outraged at how large those numbers are.

I've put together some figures by looking at the taxes portion of my pay stub. Some of the taxes are based on total pay, and others are based on federal taxable gross (which is net of things like 401(k) deductions.)

Tax% of Federal
Taxable Gross
% of Total Pay
Fed Withholding25.0
OR Withholding9.0
Fed MED / EE1.45
Fed OASDI / Dis6.2

The federal withholding has fallen over time: It was 28% in 2001, 27% in 2002, and changed from 27% to 25% during 2003. I seem to recall various Republicans pushing through tax reductions over this period. Thanks! (For your next trick, how about some spending reductions so I don't end up paying for everything through inflation?)

Knowing that the withholding on bonuses is higher than on regular pay, and being a saver who can afford it, I hatched an Evil Scheme™ late last year to annoy the tax collector. I increased my 401(k) deduction to the maximum possible, 50%, for the period when this bonus would be paid. That has the effect of shrinking my federal taxable gross and therefore the amount of tax withheld. It shrunk my withholding from (34×1.0) + 7.65 = 41.65% of total pay to (34×0.5) + 7.75 = 24.65% of total pay.

This maneuver lets me keep 17% of my bonus money today instead of the government holding on to it (read: spending it) until April 2005. The disadvantage is that the only thing I can do with that 17% is to put it in my 401(k). I'm planning to buy a new car sometime this year, and I'd much rather spend it on that — but the nanny state won't let me! It has the gall to presume to know what's best for me. I guarantee I have much better information about my own financial situation and plans than the government does!

After outright seizing a quarter of my paycheck, the government exerts its control over the next 17%, too. Whatever happened to my money being my money?

Tiny Island