So a few coworkers mentioned they’re planning to go exempt or claim 10 dependents so they don’t get taxed heavily on this bonus. I’m not sure if that’s a smart move, so I was hoping for some advice. I don’t fully get how this would play out with taxes later. I have two kids, but their mom claims one of them at tax time. I claim the other and head of household, making about 60k a year (without the bonus). Would doing what they’re suggesting be a good idea, or am I missing something?
I’m no tax expert, but I was told that this really just defers the taxes. You still owe it, whether it’s now or later when you file. I had a 5k bonus once and ended up owing a chunk back at tax time. Maybe someone with more know-how can add to this.
@Darby
Yeah, you either pay it now or when you file your taxes. It’s not free money. If you don’t withhold enough during the year, you could face penalties too.
Honestly, not worth it. You’ll end up owing that tax one way or another. If you don’t have enough withheld and owe more than $1,000, there’s also a penalty for underpayment.
>Thinking of going exempt for a 10k bonus… good idea or not?
No.
>A few coworkers suggested going exempt or claiming 10 dependents.
That’s risky and could be seen as fraud. Definitely not worth it.
>They say it will keep their bonus from being taxed too much.
Bonuses aren’t taxed differently; it’s just the withholding that varies. But in the end, the amount you owe doesn’t change.
Here’s the deal: either too much gets withheld, and you get it back at tax time, or not enough is withheld, and you’ll end up owing, maybe with a penalty. No harm in waiting for a refund if it’s overtaxed, but trying to avoid withholding could backfire badly.
The main issue here is thinking it “avoids taxes.” It doesn’t. You’ll owe the same amount whether you withhold now or not. If your friends skip withholding, they’ll likely owe more than they expect come tax time.
If you’re getting this at the end of the month or in December, the refund wouldn’t be far off anyway. Better to wait than risk owing.
Claiming extra dependents to reduce withholding doesn’t work like it used to. You can’t just put in any number you want.
Storm said:
Claiming extra dependents to reduce withholding doesn’t work like it used to. You can’t just put in any number you want.
Sort of true. It’s just calculated differently now. It used to be personal exemptions; now it’s child tax credits, but same idea.
Storm said:
Claiming extra dependents to reduce withholding doesn’t work like it used to. You can’t just put in any number you want.
The W4 form changed in 2020. Definitely pass that info along. Trying to “go big” by claiming lots of exemptions can lead to mandatory withholding orders from the IRS down the line.
Claiming 10 dependents sounds like it’d bring a painful audit. There are specific rules to claiming dependents, like they have to be under 19, live with you over half the year, and you need to support them financially.
Claiming exempt only applies if you’re super low income with no tax liability. At 60k, that’s probably not an option for you.
@Sky
Just to clarify, a qualifying child doesn’t have to be fully supported by you financially, just that they can’t provide over half of their own support.
Shay said:
@Sky
Just to clarify, a qualifying child doesn’t have to be fully supported by you financially, just that they can’t provide over half of their own support.
Got it. That makes way more sense. Thanks for explaining.
Just let the tax come out and get it back at tax time if it’s too much. Adjusting your W4 just for the bonus would take time to go through, and then you’d have to change it back. It could become a hassle.
Plus, you’d risk owing penalties if not enough gets withheld. If it’s a holiday bonus, tax season isn’t far off anyway.
A bonus is considered wages. You’ll pay the same amount in taxes now or later.
If they pay the bonus separately, the withholding should be about right. If it’s all in one paycheck, it can make it look like you earn more, so the withholding can be higher than you’ll owe.
Leaving the W4 as-is just means you get any extra back when you file. If you go exempt, you might owe a chunk later, and there could be a penalty.
Take $1,000 from your bank account and put it in another account. Bam! Now it looks like you have $2,000.
If your employer thinks your W4 info is false, they aren’t supposed to follow it. Changing it just for the bonus would look suspicious. And even if you adjust withholding, the total tax owed doesn’t change. You’d still need to set aside cash to cover what you’ll owe later.