Did you get a sign-on bonus in 2021? You may be eligible for a big tax refund
Before Bailey Schaub interviewed for a surgical technologist opening at a hospital in Kansas City, Missouri, a recruiter called to tell her about a $10,000 signing bonus she would receive if she got the job.
After graduating college in May, Schaub, 23, had moved into a new apartment in the city, living by herself with hardly any furniture. The prospect of another $10,000 could not have come at a better time.
She took the job, but when she got her first paycheck for $1,000 she earned in wages from her first two weeks as well as the bonus – she did a double-take.
More than $2,000 in federal taxes were deducted from the bonus, she told USA TODAY after reviewing her first paycheck.
“I was planning on using that check to make sure I had furniture and get everything I needed to set up my apartment,” she said. "Seeing how much was taken out of (the bonus) was definitely disappointing."
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At the time, Schaub had been sleeping on the floor on her mattress because she couldn't afford a bed frame."I had to wait for more paychecks to continue to get all the furniture and things I needed in the apartment.”
Tight labor market pushes employers to offer more hiring bonuses
Like Schaub, many other Americans have been offered signing bonuses. In 2021, nearly 13% of jobs posted on ZipRecruiter offered them, compared with 2% of jobs in 2019, according to data the site provided USA TODAY.
And across all private-sector jobs, more than 2% of employers offered signing bonuses for new hires from July through September, according to Bureau of Labor Statistics data published in February. Collectively, they employ more than 11 million Americans.
It’s a sign of the times as employers in the U.S. face one of the most competitive labor markets in decades.
“Employers who previously only offered signing bonuses to poach talent during bidding wars are now providing them to entire classes of workers – including, in some cases, to all groundskeepers or all kitchen staff,” said Julia Pollak, chief economist at ZipRecruiter. “It's a sea change from the way signing bonuses were used before.”
But what workers like Schaub often don’t realize is how big a bite the government will take away from their signing bonuses. Perhaps even less apparent is that they could be eligible for big tax refunds on the bonuses.
How taxes on a bonus work
In general, workers who received any kind of bonus under $1 million last year were subject to a 22% withholding tax.
So for someone who got a $1,000 bonus, they'd initially have $220 withheld in federal taxes. But if their income tax rate is 10% then they should only owe $100 in taxes. Once they file their taxes they should get a refund equal to $120, Karen Connelly, an IRS spokesperson confirmed.
This would likely be the case for most Americans given that the average individual income tax rate in 2019 was nearly 13.3%, according to a Tax Foundation analysis.
To get the refund, you don’t have to fill out any special form besides all the ones that you need to file your regular state and federal tax return.
(If you have any tax questions, feel free to fill out this form, which also is below. USA TODAY will be answering top reader questions as we go through the 2022 tax season.)
It’s also important to bear in mind that the bonus you get could “unknowingly” bumps you into a higher tax bracket, said Alexis Gallati, an accountant at Cerebral Tax Advisors, an accounting firm based in Knoxville, Tennessee.
In which case, you’d likely get a smaller refund if your income is still subject to a tax rate of less than 22%.
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“A lot of folks tend to think that there's a special sort of tax rate on bonuses, or that bonuses are as a specific source of income taxed at a higher rate than other sources of income,” said Garrett Watson, a senior policy analyst at the Tax Foundation, an independent think tank. “That is generally not true.”
“What tends to fuel that misperception is the withholding system,” Watson said. “Bonuses are often counted as supplemental income to your typical salary. And so they're withheld for many folks at higher marginal rates.”
A withholding tax with benefits
If you have multiple sources of income or irregular income “it can be tricky to square up your withholding with your actual marginal tax rate,” meaning that when you receive a bonus you may not actually know what tax bracket you fall into, Watson said.
It’s also designed to ensure, in most cases, that people end up paying too much in taxes initially rather than being hit later on with “a tax surprise,” said Watson, who studies federal and state tax policy, added. But that could vary depending on whether you’re filing jointly with a spouse.
One way to avoid the withholding tax on bonuses is to ask your employer to deposit the funds directly into a 401(k) or Roth IRA account, said Gallati. But that isn’t always possible if your employer doesn’t offer retirement benefits, or you have to be employed for a longer period of time to become eligible for them.
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