Hey All,
Starting Analyst 1 this summer and I had a quick question about whether my bonus can be included in 401(k) matching?
I don't see why not but I always hear people talking about banking the bonus and know it's a different tax rate; as a result, it seems you really can't and also that would be an absurd amount of money for the employer to match from all employees.
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Bonuses are not taxed at a different rate. It is ordinary income. It is generally withheld at a higher rate (I.e., what gets withheld from your paycheck) but that is just due to how most payroll systems work. So you will have more withheld and then get some back as a tax return (assuming you had the right dependents, etc in your tax forms).
As for matching, I have only ever seen employers match a $ amount (I.e., there is a limit). So you should check how much your employer actually matches (is it $5k? $10k? Etc). Generally it doesn’t matter where it comes from (regular paychecks or bonus), but again, you’ll only get a certain amount of match.
Ahhh perfect, thank you - I had heard from multiple people that bonuses are taxed at different rates although never got a good reason why. Are you for sure for sure on that?
If you are at a US bank in a standard analyst program, then that’s how it should work.
People (especially those new to the workforce) confuse this ALL the time, because when you get paid your bonus you see a lot of it go to “taxes”. This is called “withholding”, this is NOT what you pay in taxes (when all is said and done), it is the estimate your payroll dept uses to pay. So at the end of the year, if you overpaid (because you had too much withheld, which is common with bonuses) then you get a refund. Many payroll systems just assume your pay is bi-weekly (or whatever cadence you are paid) so on a bonus it thinks you are in a higher tax bracket.
Bonuses are 100%, unequivocally, taxed at the same rate as other ordinary income… they're just withheld differently as supplemental income. This is one of the most common misconceptions and it blows my mind how often people in finance repeat it… it's like thinking that being in a higher tax bracket means you take home less
Okay, I've seared that into my memory now hahaha, thank you! Very clear and how it should be, I've heard that they interpret that as your monthly income and literally tax it on that amount permanently. That's a lot better than the higher tax rates I've heard, look forward to taking a greater amount chunk home - must be a fat tax return.
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