IB Signing Bonus question
(Orangutan, 340
Points)
on 1/17/13 at 7:52pm
So WSO conventional wisdom says that, after taxes, the $10k signing bonus for IBD analysts is more like $6k. Are the taxes taken out of the bonus up front or do I pay taxes on it at the end of the year? Also, why is the total tax bill so high on just $10k of income?
It's taken out upfront. Tax
It's taken out upfront. Tax rates are higher for incentive compensation, etc.
ibanker12: It's taken out
It's taken out upfront. Tax rates are higher for incentive compensation, etc.
Thanks for the quick answer. Do you know how much higher the taxes are on incentive compensation vs salary? Why don't banks just increase base salaries and reduce bonuses...
close to 50%. Bonuses are
close to 50%.
Bonuses are paid at year-end since its aligned with performance. If its included in the salary, what financial incentive do the MD's (and lower) have in generating fees? Exactly.
Your tax rate on bonus
Your tax rate on bonus compensation, which is what a signing bonus is considered is different by roughly 10%. You get shoved into the highest bracket assuming you're an analyst.
Now this depends state by state, so if you are in NYC or CA you're going to get roughly 60% of that $10K. Good news is, that ***all comes back*** when you file taxes so its not that big of a deal. So that's another reason not to care if it comes in the form of bonus versus salary.
The funny thing about all these changes, is people in general are actually more motivated by a large lump sum check than they are by a high base salary. So all these crazy changes are actually reducing incentive. Big joke when you think about it.
Anyway hope that answers all the questions.
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Yeah just to add, incentive
Yeah just to add, incentive comp is *not* taxed at a higher rate. Tax withholding is done assuming that each check is your bi-weekly comp and you tax bracket is imputed as such. So, when it turns out you made less than $520,000 for the year (10k * 52 weeks) you will receive some of that marginal withholding back as a refund.
Barbarian@theGate: Yeah just
Yeah just to add, incentive comp is *not* taxed at a higher rate. Tax withholding is done assuming that each check is your bi-weekly comp and you tax bracket is imputed as such. So, when it turns out you made less than $520,000 for the year (10k * 52 weeks) you will receive some of that marginal withholding back as a refund.
Though you're correct that incentive compensation is not treated as different from standard income, this math isn't quite right either. The reason why bonuses are taxed at a higher rate than ordinary income is because bonuses are taxed at your marginal rate rather than your effective rate.
For instance, if you're a first year analyst making $70k, your semi-monthly salary checks are taxed at a weighted average federal tax rate (~20% or so), plus FICA taxes and state or local taxes, if applicable. In New York, this translates to something around 36%. However, you'll note that since federal income tax rates are highly progressive, you're actually in the 25% tax bracket at $70k. Since your bonus is added on top of your annual compensation, it is taxed at your marginal rate. Therefore, instead of paying ~20% federal taxes at your effective rate, you'll be paying exactly your 25% marginal rate, plus FICA and state and local taxes. Again, in NYC this adds up to about 41%.
For end of year bonuses, even a first year analyst will jump into the 28% bracket. Assuming no signing bonus, then, the first $17,850 (since the 28% bracket starts at $87,750) of your bonus check would be taxed at a 25% federal rate (~41% all-in), and the remainder would be taxed at a 28% federal rate (~44% all-in).
WallStreetPlayboys: Your tax
Your tax rate on bonus compensation, which is what a signing bonus is considered is different by roughly 10%. You get shoved into the highest bracket assuming you're an analyst.
Now this depends state by state, so if you are in NYC or CA you're going to get roughly 60% of that $10K. Good news is, that ***all comes back*** when you file taxes so its not that big of a deal. So that's another reason not to care if it comes in the form of bonus versus salary.
The funny thing about all these changes, is people in general are actually more motivated by a large lump sum check than they are by a high base salary. So all these crazy changes are actually reducing incentive. Big joke when you think about it.
Anyway hope that answers all the questions.
Also worth noting that you are NOT required to let the government withhold all of that money from your paychecks as long as you know that you will be receiving the money back when you file your income taxes at the end of the year.
Every IB summer intern should be claiming 8+ allowances when filling out their W-4 prior to starting their internship. As long as you do this, the bank won't withhold any federal income taxes from your paychecks, and you'll receive ~22% more money over the summer, as opposed to waiting until tax season to get a lump-sum check from the government.