The following is a staff writer post from MikeS. He is a married father of 2. So, with the cat, he ranks number 5 in the house. He loves numbers and helping people. Please leave any questions or comments below for either Mike or Crystal.
I am happy to report that I received my annual bonus for the work I did in 2013. It actually ended up being the highest bonus I have ever received, so I was surprised. The bonus was $20K which is about 21% of my annual salary. The company for which I work had a good year; as a result, the bonus pool was larger than it has been in recent years. Once I received the actual bonus paycheck, I realized three things. The first thing was that taxes are really annoying. The second thing was my annual compensation for the year would put me close to the Social Security earnings cap. Lastly, it is still important to save.
Those Annoying Taxes
Since a bonus paycheck is different from a normal paycheck the taxes are handled differently. The first one you will notice is your federal withholdings. This is normally a blend of your marginal tax rates for your paycheck. A bonus paycheck has your federal tax set at 25%. Once all of my exemptions (I have 4), my deductions (I itemize) and the child tax credit are taken into account, my effective tax rate is about 10%. So, naturally when I see the bonus paycheck, the federal tax withheld is significantly larger than I am used to seeing. Knowing that 25% of the bonus is going to federal taxes, I can adjust my withholding for the rest of the year. This way I can minimize any potential refund. I also have to contend with state income taxes. They also operate on a similar basis for me. The blended rate that is taken out of my normal check is about 4%. However, the bonus check has the state taxes withheld at 6.6%. Unfortunately, there isn’t any way for me to adjust my state withholdings. I simply will just receive a refund when I file my state taxes next year. The last 2 tax items are Social Security and Medicare taxes. Those are still withheld at their normal rates of 6.2% and 1.45% respectively. So, before the check even got to me, I lose 39.25% to various government entities. Like I said, taxes are really annoying.
Social Security Earnings Cap
I’ll be honest; the Social Security earnings cap hasn’t been an issue for me. It still isn’t, but I’ll be closer this year than I ever have been. If you don’t know what I’m talking about, let me explain. Once you hit the earnings cap for the year, the 6.2% Social Security tax withheld from your paycheck stops. It is like you receive an instant raise in your paycheck. The Social Security earnings cap for 2014 is $117,000. Again, I am not going to hit it this year, but it is a target to hit in the future. It would mean 2 things, that my earnings have been steadily increasing and that sometime late in the year, I’m going to get a raise. I want to have that problem where I have to figure out what I am going to do with that money.
This year was the first year that the company allowed your 401k contribution rate to also apply to your bonus check. What this meant for me was that the 7% of my salary I normally set aside would apply to my bonus as well. What I did not know, was my company’s matching contributions would also apply. The company matches dollar for dollar up to 6% and also has a flat 2% contribution instead of a pension. What that meant for my bonus, is that I would be saving 15% of it, or $3,000 before it even was in my hands. On top of that, my wife and I allocated an additional $2,500 for our emergency fund and Vanguard account. In total, we saved $5,500 or 27.5% of the bonus. I’m pretty excited about that number. That was not always the case. In years past we would have spent the entire amount and quite possibly turned off the 401k contribution to maximize the take-home check. We now know better and plan better.
It’s just a bonus
Since we don’t expect to receive a bonus like this every year, it is not part of our budget. Our monthly budget is strictly based upon what my take-home pay is every month. Since I am salaried, it does not vary from check to check. That makes planning much easier. We treat a bonus as found money and decided where the best uses for it are within budget. This year, after savings, the rest went to various spending categories we have set aside in savings. When the money is spent, we pull it out of the corresponding savings category. Hopefully, I can work hard enough this year to receive an even larger bonus next year.
Did you receive a bonus recently?