Carla\'s year-to-date earning are $1,500,00 as reported on her las monthly pay s
ID: 2550170 • Letter: C
Question
Carla's year-to-date earning are $1,500,00 as reported on her las monthly pay stub. Carla's employer wants to provide her a bonus of $700,00 separate from her regular pay. She previously received a bonus of $1,000,000 doing the current year. Carla's employer will gross-up her bonus such that she does not need to be burdened with the additional taxes related to the bonus. What will the total gross-up bonus amount be? Her employer will create the $700,00 bonus as a supplemental pay for federal and state purposes. Her employer uses a state supplemental pay rate of 4.95%.
Explanation / Answer
As per IRS rules, an employer can opt to combine regular wages with supplemental wages and withhold taxes on entire amount at applicable withholding tax rates. However, to combine both the wages, the supplemental pay must be below the threshold of $1,000,000 as stated by IRS. Any amount over $1,000,000 received as supplemental pay would be taxed at a flat rate of 35% under current rules. Hence, the gross-up bonus amount will be:
$700,000 x (1+tax rate) => $700,000 x 1.35 = $945,000