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Tax withholding question
Posted on 2/26/12 at 5:02 pm
Posted on 2/26/12 at 5:02 pm
This is probably a dumb question, but how is the amount of taxes withheld from your pay calculated? I've always thought it is roughly the same percentage based on your W-4 status and allowances. But I recently received my annual incentive and the percentage was like 3 times higher than a normal pay period. 2011 was the first year I was on an annual plan instead of quarterly, so I never noticed a big difference until now.
1
Posted on 2/26/12 at 5:11 pm to MOT
Annual bonuses are taxed at your highest marginal rate. This is because this income is not accounted for on your W-4 based withholding calculation. Therefore, any money you are paid as a bonus is "on the top" and taxed at your current marginal rate, which is the highest at the end of the year.
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