Your payment penalty on employee bonus

[YosemiteKT]

How can I avoid an underpayment penalty on my taxes? I received a substantial employee bonus last year, and obviously my withholding was insufficient… What would you suggest for this year‘s bonus to avoid a high tax liability? The amount that I owe in federal tax was nearly half the bonus itself!

[Jammerdee]

I have the same question.

[Linda-SG]

You can ask the employer to withhold taxes on the bonus.   

Congrats on the bonus(!), but it most likely pushed you into a higher tax bracket, resulting in more tax. 

Another option is to use a calculator, such as TurboTax's W-4 Calculator, TurboTax's Tax Caster tax calculator, or https://www.irs.gov/individuals/tax-withholding-estimator  and pay estimated taxes when you receive the bonus (if they haven't withheld taxes).  You can pay estimated tax payments easily at IRS Direct Pay.  You may want to see this article to understand some of the changes for 2024:  The IRS provides tax inflation adjustments for tax year 2024. That IRS page will show you the tax brackets for your filing status for 2024.  

[Mike9241]

Your employer is probably using the percentage method rather than the aggregate method

there is a simple rule to avoid penalties even though you might end up owing come 4/15

• The percentage method: Many employers choose the percentage method for its simplicity. Using this method, your employer withholds a flat 22% federal income tax rate from your bonus pay (assuming it’s under $1 million), regardless of your tax bracket. Any amount over $1 million gets hit with a bonus tax rate of 37%, and your employer has to use the percentage method if your bonus exceeds $1 million.
• The aggregate method: Using this method, your employer adds your annual bonus with your regular income in one lump sum, and you’ll have taxes withheld at your normal rate, depending on your tax bracket. 

the simple rule to avoid penalties is that withholding for the year must equal or exceed 100% of your prior year taxes. That jumps to 110% if your prior year AGI was over $150,000

different rules may apply for state income tax purposes.

if you do not like owing discuss with your employer how to go about having extra taxes withheld from your bonus. if need be 50% 

[fanfare]

As suggested above,withholding can solve your problem.

there is no penalty if your withholding alone is 90% of your final income tax.

You don't need to make estimated tax payments.

OTHERWISE

To use Estimated Tax

In your situation,
withholding + estimated tax must be 110% of your prior year tax which includes the tax on your last bonus.
IRS requires four Estimated Tax contributions, on the specified dates,
in addition to your withholding which by default is apportioned evenly.

To make this work you must start with the First Estimated Tax payment which is due April 15th.

If you missed the first two estimated tax payments, it may not work.
If you meet the prior year rule requirement your bonus could be much larger or smaller it would not matter.

I'm not a tax expert if there are special rules for bonus over $1 million, consult a competent tax advisor.

@YosemiteKT