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Paycheck Question

plainjane0415plainjane0415 member
1000 Comments 500 Love Its First Anniversary Name Dropper
in Chit Chat

OK, I know some of you are accountants, and maybe you can help me with this.

At lunch today, I was sitting with some of my coworkers and they were talking about the profit sharing bonus we all get in May.  Some of the people I work with said that they change their withholdings when it's time to get our profit sharing bonus to avoid paying taxes on it, and that they do this other times during the year when they need a little extra money.

Is that legal to do?  I mean I don't understand how you can do that, and not ever have to pay taxes on that income.

A place I used to work at prior did Christmas bonuses, they would come to us in a check form, (so not taxed with our payck) but then at the beginning of the year, the owner of the company would send a 1099 to claim that bonus as income on our taxes.  So, I'm just really confused at how people do this at random times during the year, because does that not skew your w2?  Or am I just an idiot and this is totally normal?

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Re: Paycheck Question

  • [Deleted User][Deleted User] member
    500 Love Its Fourth Anniversary 100 Comments First Answer
    That doesn't seem right. Our profit sharing bonuses are all taxed at a flat percentage (25%) company wide, I think that is driven by IRS regulations.  

    Wonder if your coworkers get less of a refund (or have to pay) at the end of the year though.
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  • marie2785marie2785 member
    100 Love Its 100 Comments First Anniversary Name Dropper
    It all evens out at the end of the year when you do your taxes, as long as this money is reported to the IRS as income by your employer (if they don't report it, then you legally must anyways). The people probably just want the money THEN vs after taxes, or they aren't realizing they end up paying the taxes on it at the end of the year in the form of a lower tax return.

    Ideally, your withholding's should make it so at the end of the year, you're even (don't owe anything, don't get anything back). It's rarely perfect--for mine I end up owing the state $20 but getting $500 back from the federal govt, but it should be as close as possible. 
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  • lyndausvilyndausvi mod
    Moderator Knottie Warrior 10000 Comments 500 Love Its
    edited April 2015
    Back when I lived in the islands and worked on the boat we made most of our money from Jan - July.  During that time I adjusted my withholding to take out more taxes.  Then from July-Dec I had them take out less. I wasn't working as much and wanted as much as my salary as possible. 

    As long as you do not owe a lot of money at the end of the year to cause penalties then there is nothing wrong with making adjustments through year.


    ETA - they still  pay taxes on the income.  They are just choosing to either take less of a refund or choose to owe the tax later.







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  • jenna8984jenna8984 member
    5000 Comments Fifth Anniversary 500 Love Its First Answer

    I don't do this but being in accounting and payroll, I have seen it done. The majority of people withhold too much throughout the year and they will get a return. And they know this based on years worth of experience/ returns. So if someone knows they are getting a $1,000 bonus check and they want the whole amount in their pocket now, rather than $750, they will opt to have that not withheld right now. Then at tax return time, they will get back say $2,750 instead of $3,000.

    But you are correct- either way it catches up with you and you are paying the tax on it. Like I said it only works if you know for a fact that you withhold too much. If you normally owe at tax time or get nothing, then doing this will screw you and you'll owe the additional.

                                                                     

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  • huskypuppy14huskypuppy14 member
    2500 Comments Fifth Anniversary 500 Love Its First Answer
    The only time it would be a problem, would be if they owe too much tax at tax time. Then you can get penalized. 

    As long as you pay the taxes you owe by tax time, it's not illegal.


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  • Bubblegum5586Bubblegum5586 member
    1000 Comments 500 Love Its Fourth Anniversary First Answer
    I had this just happen as I got a bonus on an event I was working on it it bumped me into the next tax bracket. I always withhold too much and get a refund every year so I had them change my withholding just on that check so I can see it now versus waiting for a refund next year. 

    You still owe the same amount of taxes it just depends on how you want to pay them through out the year.
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  • madamerwinmadamerwin member
    1000 Comments 500 Love Its Third Anniversary Name Dropper
    Where I work, you can change your withholdings whenever you want and as often as you want. But if you choose to withhold less now, you will owe more (or get a smaller refund) later.

    My company does bonuses in paper check form in March. They withhold 40% (which is way more than normal), so that if the bonus bumps you up into the next tax bracket, you don't get screwed. Usually it just means a bigger refund at the end of the year.
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  • JennyColadaJennyColada member
    2500 Comments 500 Love Its Third Anniversary First Answer
    It's totally legal. This doesn't change how much that you actually owe the IRS in total for the tax year, it only changes how much you've paid in (or...not paid in).
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