Should my bonus be taxed 25% or 39%?

[INGI]

I am one of equal shareholders in professional S corp. We pay ourselves salary and take out some of remaining money as distribution. All doctors are equal shareholders in S Corp therefore distributions are equal to all partners. In the "eat what you kill fashion", after distribution some doctors still have money left over in corp, and it is given to them in a form of bonus, as a separate check. In the past year my bonus check had tax witholding at ordinary federal income tax rate (39.6% in my case). But I recently read article and confirmed on IRS website that employer may elect to treat bonus as supplemental wages and withold 25% only.

My questions are that going forward should my employer (i.e. my S Corp) withhold only 25% from upcoming bonuses? Does this mean that when I do income tax in April, the IRS would tax this bonus at 25%?  Thank you.

 

https://www.irs.gov/publications/p15/ar02.html

Supplemental wages identified separately from regular wages.   If you pay supplemental wages separately (or combine them in a single payment and specify the amount of each), the federal income tax withholding method depends partly on whether you withhold income tax from your employee's regular wages.

1. If you withheld income tax from an employee's regular wages in the current or immediately preceding calendar year, you can use one of the following methods for the supplemental wages.
   
   
   

   
   
   1. Withhold a flat 25% (no other percentage allowed).
   
   
   2. If the supplemental wages are paid concurrently with regular wages, add the supplemental wages to the concurrently paid regular wages. If there are no concurrently paid regular wages, add the supplemental wages to alternatively, either the regular wages paid or to be paid for the current payroll period or the regular wages paid for the preceding payroll period. Figure the income tax withholding as if the total of the regular wages and supplemental wages is a single payment. Subtract the tax withheld from the regular wages. Withhold the remaining tax from the supplemental wages. If there were other payments of supplemental wages paid during the payroll period made before the current payment of supplemental wages, aggregate all the payments of supplemental wages paid during the payroll period with the regular wages paid during the payroll period, calculate the tax on the total, subtract the tax already withheld from the regular wages and the previous supplemental wage payments, and withhold the remaining tax.
   
   

   
   

[jfoxcpacfp]

INGI wrote:

My questions are that going forward should my employer (i.e. my S Corp) withhold only 25% from upcoming bonuses? Does this mean that when I do income tax in April, the IRS would tax this bonus at 25%?  Thank you.

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The supplemental wage guidelines are meant to give employers a default rate to withhold taxes on odd remuneration checks that aren't part of your normal salary schedule. Otherwise, if you got a $50k bonus and your normal pay schedule is weekly, the system would intuit that you earn $50k/week and calculate taxes to withhold accordingly. (in your case, however, it would be appropriate to calculate the top tier for your taxes withheld.) Just because the employer withholds only 25%, however, does not mean your tax rate on that income will be 25%. There is no connection.

When the government began requiring taxpayers to remit taxes on a pay-as-you-go system, tax tables were used to "estimate" the income taxes due on the income being taxed based upon earnings and family size. There is no reliable way for an employer to estimate the correct amount of taxes that will really be due on a payment, however, because the employer is not privy (nor should she be) to the other factors in the employee's particular tax situation. Working spouses, side jobs, itemized deductions, etc. etc. etc.

Bottom line is that you will owe taxes at whatever bracket you fall in to. You can fill out a new W4 requesting that you have extra taxes withheld from your checks or pay in estimates if you are afraid you will be underpaid next April.