Hi, I've seen conflicting reports on this throughout the site and wanted to bring it all to one thread - how exactly are bonuses in IB taxed compared to base salary? Is it bank dependent? I originally thought that bonuses had a favorable tax regime because it's a flat rate, but I've seen otherwise on the site and was a bit confused. Incoming 2022 SA at BB (GS/MS/JPM), so I'm definitely looking ahead but was just curious. Thanks!
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50%
Taxed the exact same percentage as normal, but just withheld more on your bonus paycheck
So is it not seen as "supplemental income" (which is usually a flat tax rate or 20%)? Or is it just counted as additional normal income?
The rate doesn’t change, just the withholding amount. If your tax rate is 30% for your total income in the past year, then that is what is actually being taxed. Withholding is just a way the government ensures people can pay up come tax season, not necessarily what you actually are paying in taxes.
All bonuses, regardless of industry, are taxed automatically at a 50% withholding rate.
But this isn't how much you actually pay in taxes, right? Like you get some back when you file taxes?
That depends entirely on how much you withheld in aggregate throughout the year vs. what your actual tax liability came out to be. Last year I underwithheld significantly throughout the year and despite my bonus being taxed at a 50% withholding rate I still owed a ton of money.
IMO it makes sense to owe a ton of money to the IRS at tax time, because our income increases so fast in IBD that it's easy to underwithhold a lot and avoid the penalty, I would rather have that money to invest throughout the year, and also if I get laid off before tax time I will likely not end up owing. So I try to target my withholdings to underwithhold as much as is allowed without incurring the penalty.
Just not true. I've worked for 4 companies and it's 40% every single time
It’s the same as any other income. That’s all there it is to it. You will be withheld initially higher so I guess you have to wait a year for the rest of your money.
Got paid this year — exactly 40% withholding. I believe the breakdown is 22% federal, ~10% state, ~6% social security, ~2% other.
This is how my bonuses are taxed as well. Federal (22%), State, SS (6.2%), Medicare (1.45%). Not sure where people are getting 50% withholding. Some banks just do it differently maybe. Bonuses are considered supplemental income and are taxed at 22% so anyone saying they are regular income is flat wrong.
https://smartasset.com/taxes/paycheck-calculator
Multiply your EOY bonus by 24 and plug it in. Adjust all other fields as necessary for your personal situation. You shouldn't be paying out health benefits/401k contributions from your bonus, so leave those fields blank. The resulting number is roughly what you should expect to see in your bank account when it's all said and done.
As others have mentioned, this is standard income.
You will be withheld at a higher rate because of how payroll works (assumes your bonus is your standard pay so withholds that at whatever rate it falls into).
What you will actually pay for a year is based on your total income (base and bonus). So most people are withheld too much on their bonus (at this income level) and receive a refund. As you make more the withholding becomes accurate (as your all in compensation is in the higher bracket).
youre just starting out as a summer analyst man, dont worry about how your bonus is taxed. focus on reading up on your group and getting prepared for the summer.
While bonuses are subject to income taxes, they don't simply get added to your income and taxed at your top marginal tax rate.
Sorry, seeing different perspectives here. The bonus is aggregated w other income at year-end, or is taxed at a separate rate. Seems like it would just get lumped in to me.
To be clear - there is no difference in the federal tax rate between salary and bonus for vast majority of W-2 based investment bankers. Hard stop.
The confusion relates to the amount the banker or bank chooses to withhold when bonus paid. Someone mentioned the withholding rate is automatically 50%, which is untrue. My current bank withholds bonus at 20%, resulting in me owning a large amount at tax filing season. I’ve manually adjusted this with HR to withhold a higher percentage, more closely matching my actual tax rate.
I’ve been at banks that withhold 50% of bonus income and banks that withhold 20% of bonus income - both banks allowed manual withholding overrides to increase or decrease the amount withhold.
Appreciate the input, but below seems to disagree w you
cool. As far as I know, the US Government / IRS doesn't defer to any state on federal tax rates for "special payments" or any income for that matter. But the intern who is probably filing their first tax return must know better.
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