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Let's assume one company offers 200k salary and another 100k salary and 100k bonus at the end of the year. Is there a difference for me at the end of the year (after all taxes are returned)?

The reason behind the question, is that I have seen people telling that bonuses are taxed at the higher rate. Unfortunately upon a quick google resources claim drastically different numbers (from 18% to 40%), which confuses me.

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  • 18
    Is the bonus guaranteed? Will you definitely still be working there in a year? A big non-tax difference is that if you leave the job in the middle of the year, one company will have paid you 100k and the other only 50k. You also end up with a difference at the end of the year if the second company decides not to pay you the bonus, or to pay a smaller bonus.
    – yoozer8
    May 6, 2020 at 20:34
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    @yoozer8 thank you, I am aware of this possibility. My main question here was about taxes on bonuses and by framing the question in this way, it was the easiest for me to understand it.
    – random
    May 6, 2020 at 20:44
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    there is absolutely no difference between "pay" and "bonus". they are identical: they are the same thing, income.
    – Fattie
    May 8, 2020 at 17:25
  • With the latter your paycheck is taxed at the 100k bracket all year so everything is fine and dandy but then a 100k bonus comes in which means you should have been getting taxed at the 200k bracket all year; the IRS wants that missed tax money so they essentially claw it back. So even though you might have been expecting a refund, it's going to get eaten up in those "claw-back" taxes.
    – MonkeyZeus
    May 8, 2020 at 18:10
  • In contrast, if the year-end bonus was something more sensible like $2,000 and it didn't put you in a higher tax bracket then it would be taxed at the same rate as your salary.
    – MonkeyZeus
    May 8, 2020 at 18:18

3 Answers 3

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Not in the U.S. (and I presume not in California, but I don't know for certain). There's no distinction on tax returns between salary income and bonus income.

What you're probably noticing is that income taxes are withheld at different rates for recurring income like salary and non-recurring income like bonuses.

Income tax on recurring income is withheld at a rate that would be applicable to that income extrapolated to the whole year. So if you make $1,000 in a week, that income es extrapolated out to a $52,000 income for a year and taxes are withheld at the effective rate for the year (after deductions and exemptions are considered).

Bonuses are additional income that is not included in the above calculation, so taxes should be withheld at the marginal rate for your income. Since your annual income cannot be inferred from bonuses, however, a static rate (e.g. 22% for federal tax) is withheld that is typical higher then the effective rate since no deductions or exemptions are applied (they're all accounted for in your recurring income).

Note that the calculation is not perfect, which is why you either get a refund or a tax bill when you file and all income and deductions are accounted for. So long as you didn't withhold too little, there's no penalty for being inaccurate in your withholdings.

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    "Income" is not "income". Salary, wages, and bonuses are all employment income, but employment income, self-employment income, "ordinary" income (e.g., royalties), and various kinds of investment income all have different rules. May 7, 2020 at 14:14
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    ELI5: There's no distinction. They might set more aside when you first get it 'to be safe', but come tax season everything will be calculated the same. (And at that time you'll either owe money or be refunded extra, same as if that was your whole salary throughout the year) May 7, 2020 at 16:54
  • My wife had an employer in the past ask if she wanted her bonus processed to have lower taxes withheld. May 8, 2020 at 14:29
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This is a broad response for any country with a progressive tax system (basically all of them), which means that you pay incrementally higher tax for each new dollar of income earned.

In short, your average rate of tax on your income is lower than your marginal rate of tax. Your average tax rate = your final tax bill divided by your income. Your marginal tax rate is what an extra dollar of income would be taxed at. Your marginal rate is higher than your average rate, because your marginal tax rate goes up on additional income earned in a higher tax bracket.

Example: in California you pay ~2% taxes on income between 17k and 41k, and 4% on income up to 65k, and federally you pay 10% on up to $10 in income, and then 12% on income up to 40k, and then 22% on up to 80k. So from this information alone, if you had ~40k in income your rate would be about 2% CA + about 11% federal = ~13%. But every extra dollar you earn would be taxed 4% CA, and 22% federal = 26%. So that new dollar is taxed 26%, because that is your marginal tax rate. [Note - that extra dollar of income would have 26% whether it was earned by a bonus or regular wage].

This is even before considering your standard deductions, which further reduce your average tax rate, but have no impact on your marginal tax rate.

What this means is that when your taxes are withheld, they are withheld based on your expected salary for the year * your average tax rate. But when bonus taxes are withheld, they are taxed at your marginal tax rate at that point in time.

So if you look at your paystub with a bonus, it shows a higher rate of withholding, but that is an illusion. Your regular pay, if it increased that much for the rest of the year, would have the same ultimate impact on your net taxes, you just don't see it that way because you see your regular paystubs including the low rate of tax on lower chunks of income + standard deductions etc.

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End of year bonus might actually be paid in the next year; this is common. So if you work all 12 months of one year, get your bonus, then quit in February of the next year, you have ~$100K income in each of 2 tax years.

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