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ELI5: Why Are Bonuses Taxed So Much?




It's that time of the year. Bonus season! You got a great review and the numbers to match. You've already made big plans for it. Then the day comes. What?? It's half what I expected. Why are my taxes so high? 

This sticker shock is very common. Don't be alarmed, it's not a mistake. Just standard payroll practices.

It's important to remember that taxes are truly only assessed (and paid) once a year - when you file. All the other times you're "paying taxes" is just your payroll friends pre-paying for you. Payroll withholds from your paycheck to make sure you don't get a giant tax bill come filing time. 

Payroll can only estimate your annual earnings. They have no idea how much you'll make throughout the entire year. So their software will treat every paycheck as if this is how much you'll make every period (wouldn't that be nice). Your bonus is probably multiples of your regular paycheck and this puts you in a much higher tax bracket. Hence the big tax deduction. 

At the end of the day (or more aptly, year). Your taxes will be based on your total income. Come filing time, if your earnings don't justify such high taxes, you'll get back what's rightfully yours. 









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