Biglaw - owe a ton in taxes Forum

[Anonymous User]

Last year I was a fifth year associate in a market-matching biglaw firm. I got slightly elevated bonuses (year end and special) because of high hours. Turbotax says I owe about $30,000 in federal taxes. That seems like a massive amount for the firm's withholding to have been off by (and at least twice what I owed last year), but wanted to check to see whether it is in the realm of what other people are seeing, or if something may be off.

[Anonymous User]

Last year I was a fifth year associate in a market-matching biglaw firm. I got slightly elevated bonuses (year end and special) because of high hours. Turbotax says I owe about $30,000 in federal taxes. That seems like a massive amount for the firm's withholding to have been off by (and at least twice what I owed last year), but wanted to check to see whether it is in the realm of what other people are seeing, or if something may be off.

That strikes me as absurd

[Anonymous User]

A lot of associates make this mistake. For bonuses of less than $1 million that are paid in 2021, the bonus tax rate is 22%, not the standard federal tax bracket.

[Anonymous User]

Something similar happened to me this year due to getting married and not changing the withholding on my spouse's much lower salary. We wound up owing about $20,000 in federal taxes but it was very easy through the IRS to set up a payment plan so I didn't have to pay all at once.

Prompted us to speak to an accountant and make some changes going forward to prevent it from happening again. But it seems truly absurd to be this far off on the firm's side. I'd reach out to the accounting team to figure out what might have gone wrong so it can get fixed for next year.

[Chrstgtr]

Last year I was a fifth year associate in a market-matching biglaw firm. I got slightly elevated bonuses (year end and special) because of high hours. Turbotax says I owe about $30,000 in federal taxes. That seems like a massive amount for the firm's withholding to have been off by (and at least twice what I owed last year), but wanted to check to see whether it is in the realm of what other people are seeing, or if something may be off.

It’s not the “firm’s” withholding. It is what you told them to do and federal law. It’s your responsibility to fix it by estimating your owed taxes and adjusting any additional withholding. Normally, I just accept the “tax bomb” because I’d rather hold onto the extra bonus money in January than risk over withholding and wait for the government to pay back their interest free loan. This year, though, I will ask payroll to adjust my withholding for the last paycheck to avoid an under withholding penalty, which I’ve been able to avoid due to the increasing size of bonuses (which won’t be true this year unless we get a nice special bonus surprise).

[12YrsAnAssociate]

A lot of associates make this mistake. For bonuses of less than $1 million that are paid in 2021, the bonus tax rate is 22%, not the standard federal tax bracket.

I don't think this is quite right. I think the ultimate tax rate is the person's normal marginal income tax rate, but the employer has the option of calculating withholding differently by treating the bonus as supplemental income. So maybe the firm calculated withholding at the 22% supplemental income rate, but the marginal tax rate owed is much higher?

[Jchance]

A lot of associates make this mistake. For bonuses of less than $1 million that are paid in 2021, the bonus tax rate is 22%, not the standard federal tax bracket.

I don't think this is quite right. I think the ultimate tax rate is the person's normal marginal income tax rate, but the employer has the option of calculating withholding differently by treating the bonus as supplemental income. So maybe the firm calculated withholding at the 22% supplemental income rate, but the marginal tax rate owed is much higher?

Do your own research.

E.g., https://turbotax.intuit.com/tax-tips/jo ... /L7UjtAZbh.

[Wanderingdrock]

If you received your six-figure bonus in late December, then yeah, this seems in the realm of possibility. The withholding may have been exactly right all year but there was no good way for the formulas to take into account that you would receive a six-figure bonus right at the end. And, as noted above, the federal withholding rate for bonuses is 22% - potentially much lower than your real marginal rate, especially if you're single.

[12YrsAnAssociate]

A lot of associates make this mistake. For bonuses of less than $1 million that are paid in 2021, the bonus tax rate is 22%, not the standard federal tax bracket.

I don't think this is quite right. I think the ultimate tax rate is the person's normal marginal income tax rate, but the employer has the option of calculating withholding differently by treating the bonus as supplemental income. So maybe the firm calculated withholding at the 22% supplemental income rate, but the marginal tax rate owed is much higher?

Do your own research.

E.g., https://turbotax.intuit.com/tax-tips/jo ... /L7UjtAZbh.

OK thanks, looks like I was right. Withholding is different; ultimate tax liability isn't.

https://www.nerdwallet.com/article/taxe ... uses-taxed ("Even though bonuses are ultimately taxed as regular income by the IRS, your employer can use two different methods to calculate withholding.... The disadvantage of this [supplemental income] method is that most people's effective tax rate is not 22%. If you're in a higher tax bracket, there's a chance that not enough of your bonus was withheld for taxes, which can lead to a surprise tax bill at the end of the year. On the other hand, if you're in a lower federal tax bracket, your bonus might get taxed at a higher rate than your regular income. That means more of your bonus will be withheld, but you might get a tax refund when you file.")

https://molentax.com/how-is-my-bonus-taxed/ ("You don’t pay higher income tax on a bonus than you do your other wage earnings. However, the government does require that a minimum federal income tax withholding rate be applied to bonus earnings. The two can be confused very easily, so I’ll try to clarify.

Bonus: $4,000

Federal income tax withholding minimum rate: 22%

Actual federal income tax withheld: $880

Possible tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, 37%

So far, it does appear that your bonus has been taxed at a specific rate. However, this is not the case. Your withholding rate is a specific, governmentally regulated rate, but upon filing your individual income tax return you’ll determine what tax bracket you’re actually in. This is where the actual tax happens.

This fundamental piece of information is lost on most people. Just because the government requires your employer to take out a certain amount of tax from your bonus, doesn’t mean you pay that tax to the IRS, and it’s gone forever.").

[Anonymous User]

A lot of associates make this mistake. For bonuses of less than $1 million that are paid in 2021, the bonus tax rate is 22%, not the standard federal tax bracket.

This. This took me longer than I admit to catch onto as an associate (to be fair, it didn't matter much as a junior but it became an issue as bonuses grew and the withholding discrepancy expanded). It's worse in some ways as a partner in that there's no withholding at all so your taxes are all your own to fuck up if you don't set aside money every draw.

[rshackleford123]

The IRS has a withholding calculator that is very helpful in estimating your tax liability based on your withholdings: https://apps.irs.gov/app/tax-withholding-estimator

I like to take a look at this calculator around mid-year when we've maxed out 401(k), and then again in September, just to make sure there isn't anything massively off. If you check into this throughout the year, you have time to adjust your withholding to reduce any tax bombs.

[Buglaw]

A lot of associates make this mistake. For bonuses of less than $1 million that are paid in 2021, the bonus tax rate is 22%, not the standard federal tax bracket.

I don't think this is quite right. I think the ultimate tax rate is the person's normal marginal income tax rate, but the employer has the option of calculating withholding differently by treating the bonus as supplemental income. So maybe the firm calculated withholding at the 22% supplemental income rate, but the marginal tax rate owed is much higher?

Do your own research.

E.g., https://turbotax.intuit.com/tax-tips/jo ... /L7UjtAZbh.

OK thanks, looks like I was right. Withholding is different; ultimate tax liability isn't.

https://www.nerdwallet.com/article/taxe ... uses-taxed ("Even though bonuses are ultimately taxed as regular income by the IRS, your employer can use two different methods to calculate withholding.... The disadvantage of this [supplemental income] method is that most people's effective tax rate is not 22%. If you're in a higher tax bracket, there's a chance that not enough of your bonus was withheld for taxes, which can lead to a surprise tax bill at the end of the year. On the other hand, if you're in a lower federal tax bracket, your bonus might get taxed at a higher rate than your regular income. That means more of your bonus will be withheld, but you might get a tax refund when you file.")

https://molentax.com/how-is-my-bonus-taxed/ ("You don’t pay higher income tax on a bonus than you do your other wage earnings. However, the government does require that a minimum federal income tax withholding rate be applied to bonus earnings. The two can be confused very easily, so I’ll try to clarify.

Bonus: $4,000

Federal income tax withholding minimum rate: 22%

Actual federal income tax withheld: $880

Possible tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, 37%

So far, it does appear that your bonus has been taxed at a specific rate. However, this is not the case. Your withholding rate is a specific, governmentally regulated rate, but upon filing your individual income tax return you’ll determine what tax bracket you’re actually in. This is where the actual tax happens.

This fundamental piece of information is lost on most people. Just because the government requires your employer to take out a certain amount of tax from your bonus, doesn’t mean you pay that tax to the IRS, and it’s gone forever.").

Yeah, I was flabbergasted there for a second and wondering if I overpaid taxes for like 7 years. Turns out, no.

[1styearlateral]

I'll never understand people making over $150k/year not hiring an accountant or tax professional. It's rare a competent accountant would make a mistake, but more importantly it's just one less thing I need to worry about each year.

[Anonymous User]

I'll never understand people making over $150k/year not hiring an accountant or tax professional. It's rare a competent accountant would make a mistake, but more importantly it's just one less thing I need to worry about each year.

Unless you have a uniquely complicated situation, the software websites are perfectly fine. Your tax bill is going to be the same no matter who does your returns. The discussion here is about withholdings. I'm not sure how using an accountant would change OP's situation unless OP asked in advance how to set up withholdings.

[Wanderingdrock]

I'll never understand people making over $150k/year not hiring an accountant or tax professional. It's rare a competent accountant would make a mistake, but more importantly it's just one less thing I need to worry about each year.

I've used a tax professional but switched to Turbotax. I've found Turbotax to be easier, faster, and much cheaper. The easier/faster bit seems counterintuitive but has been true for me - my tax pro started using a questionnaire where I was basically transcribing all of my info, and I couldn't get real-time answers to questions about the line items. Turbotax, for less than $150 for most filers without super complicated situations, walks you through every aspect of federal and state filing, with helpful buttons you can click if you have questions. You drag and drop your forms, or link directly to your accounts, and it does the transcription. Even more important, any given tax pro only brings their own expertise to the table, and might even delegate to juniors who lack expertise or attention to detail. Turbotax crowd-sources answers to questions and publishes helpful how-tos for anything tricky. It really is better at a fraction of the cost, so long as all you've got is W-2 income and some normal-person investments. Things presumably get more complicated if you're dealing with trusts, business ownership/partnership, or rental properties.

[CanadianWolf]

A lot of associates make this mistake. For bonuses of less than $1 million that are paid in 2021, the bonus tax rate is 22%, not the standard federal tax bracket.

Did you intend to state that the bonus tax withholding rate is 22%, and not that bonuses are taxed at 22% ?

[Rule23andMe]

A lot of associates make this mistake. For bonuses of less than $1 million that are paid in 2021, the bonus tax rate is 22%, not the standard federal tax bracket.

Did you intend to state that the bonus tax withholding rate is 22%, and not that bonuses are taxed at 22% ?

Not that person but yes, other posts in this thread implicitly corrected/pointed this out

[BrowsingTLS]

Good to know I'm not the only associate who got fucked by this. Several thousand dollars owed.

[Anonymous User]

I also owed the Feds about the same amount and my accountant blamed withholding amounts, but I also received both 2020 and 2021 bonuses in 2021 along with the special bonuses and a lateral signing bonus so that may have thrown everything off. I also had a decent amount of capital gains to add to the equation. I got around $12k back from NY at least to soften the blow.

[unlicensedpotato]

I owe like $25k due to taxable dividends and bonuses, but you just plan in advance and it isn't a big deal. Much better than being overwithheld and my under withholding penalty was like $42 or something (which should be unique to this year because of the high percentage of comp designated as bonuses), not worth messing around with.

[Anonymous User]

You’re not alone. I have an insanely high tax bill this year and the other associates I’ve discussed with do too.