If you are considering moving companies, and someone is offering what sounds like a very generous and lucrative offer, before you go ahead and jump ship, it’s important to consider how much of that signing bonus is actually available for you to spend.
And that is the focus of this article, which will also answer all of your most frequently asked questions on the subject along the way.
By the time you get to the wrap up at the end, you will be in a better position to assess the true value of any signing bonus that you have been offered.
Please feel free to scroll ahead to any section that jumps out at you. Here goes.
We’ll kick things off by clarifying a few basics.
Do Signing Bonuses Count As Income?
The first thing you need to establish is whether or not signing bonuses are classed as part of your adjusted gross income.
And it turns out that while signing bonuses are in fact subject to income taxes, the IRS does not consider them part of your regular wage.
As such, the signing bonus counts as supplemental income, and it is subject to different federal withholding rules.
So, the answer to the question “Are Signing Bonuses Taxed?” is that yes, they are.
How Much Of A Signing Bonus Is Taxed?
A signing bonus is typically subjected to two different taxes, one for the federal government and one for the state, as follows…
Proportion Of Signing Bonus That Goes To The Federal Government
Unfortunately, for those who are offered a substantial signing bonus for a new job, a significant portion of the bonus goes to the federal government.
This comes to between a fifth and a quarter of the total bonus amount, or, more specifically, 22 percent. This is a flat federal withholding rate.
This means that if you were offered a signing bonus of $1,000, then you would have to hand over a hefty $220 to the federal government.
You have to admit that’s quite substantial.
This has implications for businesses, too.
For example, if a business wished to offer a full $1,000 for a prospective employee to use as they please, then the business would have to issue a signing bonus of well over $1,000, so that the government’s cut would leave at least $1,000 left for the recipient.
Proportion Of Signing Bonus That Goes To The State
Similarly, in addition to a portion of your signing bonus going to the federal government, some of it will also go towards the state.
In order to find out the tax rules for signing bonuses for your particular state, please head over to the official website for your state.
Why Are Signing Bonuses Taxed So High?
For many people, this 22% federal tax on signing bonuses strikes them as rather unfair, and many have asked the question why they are taxed so high…
This is because signing bonuses are classed as supplemental income, and as such the IRS holds it to a higher withholding rate.
How Is The Federal Tax On Signing Bonuses Affected By How The Paychecks Arrive?
You may also be interested to learn that how your signing bonuses are made out in your paycheck influences how your amount of federal tax payable is worked out…
It turns out that the IRS uses a different methodology to withhold taxes from paychecks where you only receive bonus income, compared to when your bonus was lumped into a regular paycheck.
Do You Have To Pay Back A Signing Bonus Pre Tax?
When you get a signing bonus, all of your usual taxes are withheld, including the likes of income tax, FICA, and Medicare.
Then in future paychecks, the money owed is typically withheld by the employer to pay these taxes.
However, in some instances, these taxes are not always withheld, which means that you will have to pay back either the full amount, or the gross amount minus the FICA and Medicare, depending on whether it’s the same year or a different year.
What Is Considered A Good Signing Bonus?
As a general rule, a signing bonus that comes to 10 percent or more of your annual salary is considered to be a good signing bonus.
But again, as we mentioned earlier, you will not have access to the full total amount, and you will be required to hand over 22% of the bonus to the federal government.
Some businesses require their employees to put in time at work before they receive their first paycheck, and normally this could be problematic for some people who will need to continue to pay the likes of rent, mortgage, and utility bills.
So in this situation, having a signing bonus made readily available can be particularly handy, and would prevent having to default on a mortgage payment.
And in this instance, a 10% signing bonus is not so much of a bonus as a lifeline.
Should I Accept A Job Based On The Signing Bonus?
Cold hard cash is always very tempting, especially if it’s a substantial amount. And 10% of your usual salary is particularly attractive.
However, in the long run, it may not necessarily be in your best interest to accept a new job purely based on the salary alone. You should also consider how much you would like or dislike the job, because this is incredibly important for your mental health.
Similarly, if you were to continually jump from one job to another based on the signing bonus offered, this could make you appear very uncommitted on your resume, and employers would assume that any signing bonus they offer would be a waste because you’ll be gone again in no time.
So, to summarize, any signing bonus that comes to 10% or more of your annual salary is considered to be a good bonus. But sadly, you will have to pay 22% of your signing bonus as federal tax, and you may have to pay a portion as state tax as well.