Many employees owe large tax bills due to insufficient withholding on bonus income. Withholding is based only on base salary, not potential future bonuses.
When a large bonus pushes total income into higher brackets, the original withholding is insufficient. The employer doesn’t account for unknown potential bonuses when calculating withholding.
To avoid owing a lot come tax time, do some proactive planning. Make an estimated tax payment around end of Q3 when you have visibility into full year income. Gives time to also increase withholding if needed.
Estimated payments aren’t required quarterly – one payment in Q3 allows you to see total income picture while leaving time to adjust withholding before year end.
Proper planning avoids major tax bills from bonus income unexpectedly pushing you into higher brackets. Monitor your situation and make timely estimated payments.
