hello forum,
I have a bonus income tax-related questions.
I'm a NYC resident with 2 Fed allowances. Income is $55k/year. I'm about to receive a $5000 bonus and was asked whether it should be calculated using "percentage method" (25% flat rate) or "aggregate method" (which would be a 39% rate given my 2 Fed allowances). I was told i would get more money now if I should the "percentage" method, but would have to pay more in taxes on 4/15. However, if I chose 'aggregate method', i would receive less in bonus but pay less on 4/15. Can somehow explain this to me please?
thanks

“I'm about to receive a $5000 bonus and was asked whether it should be calculated using "percentage method" (25% flat rate) or "aggregate method" (which would be a 39% rate given my 2 Fed allowances). I was told i would get more money now if I should the "percentage" method, but would have to pay more in taxes on 4/15. However, if I chose 'aggregate method', i would receive less in bonus but pay less on 4/15. Can somehow explain this to me please?”-------> In practice, the lump sum is often much smaller than you expect once your ER withholds taxes. In fact, many EEs are shocked to discover their bonuses are taxed more heavily than their regular paycheck. Your ER has a couple options about withholding taxes from your bonus; the percentage method requires a flat 25 percent of your bonus be withheld for FICA and income taxes. For most taxpayers, this flat rate is higher than traditional withholding rates, which only assess the 25 percent tax on earnings above $34,500($46,250 for HH filing status) as of 2011, taxing all earnings up to that threshold at 15 percent. This requires the employee to withhold that much for taxes, in addition to common state-based withholding requirements. The aggregate method process combines the amount of your most recent paycheck and your bonus, and calculates the total amount of withholding necessary for a paycheck of that size. After subtracting the amount previously withheld from your paycheck, your ER calculates the amount of income tax to withhold from your bonus amount. Because withholding is calculated based on year-end earnings as if you were earning the amount of your bonus each pay period, you're likely to be taxed at a much higher rate than normal using this method, particularly if you receive a large bonus. Other ERs may treat the bonus as an entirely separate payment but still withhold taxes using standard withholding tables, essentially treating it as an additional check. So, you're likely to see much of those taxes returned to you at the end of the year. When you calculate your income taxes, withholding rates from your bonus are likely to be far above normal for your tax bracket. The overpayment will be used to pay any outstanding portion of your tax bill, and the balance will be returned as a refund check.
Please visit the Web site here ; PaycheckCity.com | Bonus Calculator (percentage method)

Thanks for the reply.
So, on my regular paychecks, I currently withhold 13.35% for Federal taxes. The regular/automatic withholdings on my bonus would increase to 39% in total (23% of that being Federal). Side Q: why does Federal tax jump up to 23% for my bonus?? Is it because the tax is different for a bonus, or is it because the Fed tax amount increases the more money you make?

Since I'm in the 25% tax bracket, is it better for me to withhold the 'regular/automatic' withholdings (being 23%) or choose to withhold 25%, so I'm in line with my tax bracket.
Is there one scenario which is 'better' for me come 4/15?
Thanks

“So, on my regular paychecks, I currently withhold 13.35% for Federal taxes. The regular/automatic withholdings on my bonus would increase to 39% in total (23% of that being Federal). Side “----->I guess so.I guess there is a widely-held belief that the extra income from a bonus, which is not really extra, just a variable aspect of compensation, supposedly bumps them into a higher tax bracket. This, they believe, is bad, because it would mean that they owe the government a higher tax rate on all of their income. This is incorrect and represents confusion about marginal tax rates.These misconceptions and the resulting complaints are intensified when the bonus check arrives with a net payment amount representing only a fraction of the gross income listed on the pay stub.For most taxpayers, the IRS treats bonus income the same as regular income. All taxable W-2 income gets added together in one box when you file your federal tax return form, and the same tax rate applies. There is a catch, and this is why confusion is rampant: While the IRS doesn’t discriminate between regular pay and bonus pay, employers often do.
“Q: why does Federal tax jump up to 23% for my bonus?? Is it because the tax is different for a bonus, or is it because the Fed tax amount increases the more money you make?”----->Possibly. As described above. ERs can choose between two methods of withholding federal taxes from bonus or supplemental income when it is given to the EE in a check or direct deposit separate from regular income.1)the ER may withhold a flat 25% for federal income taxes from the bonus payment. If the EE receives over $1 million in bonus payments in one year, the ER can withhold 35% from the amount over $1 million in addition to 25% of the first $1 million. 2) the ER may add the bonus payment to the most recent regular income payment, determine the standard withholding based on tax tables and the sum of the two payments, subtract the amount already withheld from the most recent regular income payment, and withhold the rest from the bonus.3) the ER may base withholds on the sum of the bonus and regular pay using the standard withholding tables.Regardless of the method the ER chooses, bonus income and regular income are grouped together when you file your taxes. The IRS will refund any overpayment and will collect any underpayment.

“Since I'm in the 25% tax bracket, is it better for me to withhold the 'regular/automatic' withholdings (being 23%) or choose to withhold 25%, so I'm in line with my tax bracket. Is there one scenario which is 'better' for me come 4/15?”----->In my opinion, Bonuses are compensation and as such are subject the Federal Income Tax Withholding, SS and Medicare (both Employer and Employee portions). Although this is not scientific, when in doubt You may always set aside 25%. Then no matter which way the actual figure goes you are not going to owe much or get back much. It proves to be a fairly safe bet. For example, if you usually receive a large refund, it would be wise to look at your deductions you have marked on your W-4 with your ER. If you change your deductions and have less deducted from each check you could either use that on other expenses throughout the year or save it and use it to buy something like you use your tax refund; a tax refund should not be considered “free money”. If you do receive a large tax refund, you are essentially giving the government a tax free loan.