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The Incredible Shrinking Bonus

Last year I decided to make a (nearly pointless) gesture in protest of excessive taxation. I did it again this year. And because it might provide some amusement, I'll tell you about it.

Income tax withholding on regular wages can be adjusted through a W4 form. But bonus wages are always withheld at the supplemental rate. The federal supplemental rate is 25%, and Oregon's supplemental rate is 9%, for a total income tax withholding rate of 34%. This is substantially higher than the effective withholding rate I pay on my regular wages.

I don't like that. It irritates me. I want that money to benefit me, not the government. I find little consolation in the eventual tax refund, because the government will have held my money for over a year before I get it back!

So, what's my nearly pointless gesture? The only way to reduce the effective withholding rate on a bonus is to reduce the amount of money subject to withholding. Which means a before-tax deduction, like as a 401(k) contribution. I temporarily increase my 401(k) deduction as much as possible (my employer allows up to 50%) to maximize the amount of money working for me and minimize the amount going to the government.

This decision ironically makes bonus season the time of the year when my discretionary income is smallest. Here are the deductions:

  • 1.45% - Medicare
  • 6.2% - Social Security
  • 50% - 401(k), reduces pay subject to income tax
  • 12.5% - Federal supplemental (25% of the taxable 50%)
  • 4.5% - State supplemental (9% of the taxable 50%)

That's 74.65%. Three-quarters of my bonus goes to deductions! (Actually, it's even more than that due to an employee stock purchase plan.) But only 24.65% of it goes to the government, instead of 41.65%.

Yes, that's right, regular taxes on bonuses are over 40%! I can reduce the taxes only by funneling the money into a 401(k), but this is a deduction and further decreases the amount of money I can take home and spend.

I cannot take home and spend even 60% of a bonus. If you ever wonder whether taxes are too high, the answer is "yes."

Tiny Island