I earned a bonus in 2021 payable over 3 years. I retired in 2022. My recent bonus payout calculated the Social Security deduction at 12.4%. The bonus was earned while I was employed and paid while I am retired. Should I pay the 6.2% employee deduction or the 12.4% self employed deduction?
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What tax form was the income on?
It sounds like the bonus was reported on a 1099-NEC.
Normally, bonuses are compensation for work performed, and should be included on your W-2. If your bonus was normally on a W-2 but this time was paid on a 1099-NEC, that's probably because you were removed from the regular payroll system. I will have to do a bit more research on this situation, unless someone else knows the answer off the top of their head. Does retirement change the tax treatment of the bonus? I suspect retirement does not change things, and the payment should have been reported as regular wages on a W-2, with normal tax withholding and the employer paying half the social security and medicare tax.
We also have to determine if this is a payment is compensation for services performed for your employer. There are some industries (mostly sales) where the worker gets an incentive payment directly from the manufacturer. This is not considered compensation and not subject to social security tax at all. (For example, you work for Bob's Appliance Store and Bob pays a regular wage. Maytag sends you a separate incentive payment every time you sell a Maytag appliance. This payment is not wages or compensation since you don't work for Maytag, and is not subject to SS tax.
I suspect that this payment should have been on a W-2, and you can file a form 8919 with code H to pay the 6.2% employee half, instead of filing a schedule C for self-employment and paying the full self-employment tax. On the 1099-NEC interview there is a checkbox for "this should have been on a W-2 from my regular employer."
But because of the retirement issue, we may want to double-check that.
Thank you. The answer was very helpful. I discovered that the bonus is to be paid out over 2 years and the entire SS deduction is taken in the first payout. Next years payout will have no deduction for SS.
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