Taxes on signing bonus money (what to expect?)

Does anyone have any tax advise on how to plan ahead for taxes that you will owe when receiving bonus money for a gas lease?  

I'm assuming its around 25% as I don't think it gets taxed at 15% like capital gains.  Is this correct?

Is there a quarterly estimate that you must file with the IRS?

Any insights would be appreciated!

Thanks!

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Permalink Reply by Bill on July 28, 2012 at 8:31am

Archer Man,

It's taxed as regular income, so whatever your income will be at the end of the year will determine you tax rate. 25 % sounds about right.  We hired a tax professional (worth the couple hundred bucks for the flings) and are making quarterly payments to the state (we live in Ohio, but property is in PA) and the Fed.  Our tax guy STRONGLY encouraged us to make quarterly payments!  Hope this helps!

Good luck!

Bill

Permalink Reply by Angela Smith on July 28, 2012 at 10:54pm

I'm not a CPA, but I believe the tax liability is a little more complicated.  First, there is federal income tax, which is clear if you receive your bonus money in 2012, but unclear if you receive it in 2013 as taxes will change (at a minimum, there will be the 3.9% Obamacare tax on incomes over 250,000).  As Archer Man said, the bonus is addded to your other income and taxed as ordinary income.  So estimate your income for the year you expect the bonus, add your anticipated bonus, subtract your usual deductions and go to the tax tables  to determine your federal liability. 

Don't forget state taxes, usually 6-7% for high income earners. 

As for quarterly estimated tax payments, we were advised that you were only obiligated to make them to the extent that you had a tax liability the year prior.  Check into this with your own accountant.  It is important because the bonus money could be earning income for you instead of going to the IRS.  We were also advised to pay the State tax due in the year received so that it can be deducted on your return. 

Permalink Reply by Bluflame on July 29, 2012 at 1:01pm

 I am also not a CPA, so take my comments with a grain of salt. I have filed estimated taxes the past several years. My accountant told me that the IRS (and other taxing entities) have a "safe harbor rule". It works like this: pay 110% of your previous year's actual tax in equal quarterly increments. In that way, you can pay the remainder of your tax liability (assuming there is one) on 4/15 without a penalty. Otherwise, the underpayment penalty can be onerous.

  The theory is protecting people who have wildly fluctuating annual income caused by events such as O&G lease bonus payments. Others with additional info or different info are welcome critique my assertion.

BluFlame

Permalink Reply by Cheryl on August 2, 2012 at 9:37am

Based on discussion with our accountant, we set aside 35% to cover taxes.  Came out pretty close to that when it was all said and done.  My opinion is talk to an accountant and don't underestimate!  Better to have a little left over than to come up short when the tax man is knocking at your door!

3uq96odaochmjPermalink Reply by 3uq96odaochmj on July 29, 2012 at 1:34pm

"Bonus" payments, "Signing" payments, Delay Rental Payments - all counted by the IRS as ordinary income.  You pay: Federal, State, Local, Social Security, Unemployment, Mdeicare/Medicaid, etc.

 

Welcome to the 35% tax bracket!

Permalink Reply by mike4t on July 29, 2012 at 3:25pm

Jasper,

I think this is considered "rental Income", and having rental properties for years and shallow oil sales for years, I do know that you do not have to pay SS, Unemployment, Medicare, etc on that rental income... it is only counted as income in as much as you have some costs/expenses to offset the income... you DON'T have to pay the other (SS, UnEm, Med) .... I try to file as many expenses as is legally possible every year!!!

This year I am contributing as much as I can to my 401K (like 30+%).... totally pre-tax dollars!!! and that amount reduces my tax liability

Permalink Reply by RichR on July 30, 2012 at 1:57am

I agree, it is treated as rental income as stated above.  You DO NEED to pay estimated income tax even if you received the bonus at the end of the year.  In that case you must fill in a schedule showing your income for the previous months in the tax year to show you did not earn the extra money then or you will be paying a penalty for not paying quarterly estimated payments for the earlier quarters of the year.  They gotcha no matter what.

Permalink Reply by Steven Kacerski on July 30, 2012 at 2:48am

You do NOT need to make estimated tax payments if you have paid in 110% of your prior year tax throught previous estimated tax payments or withholdings.  BluFlame's post above is correct on how estimated taxes work.

Permalink Reply by RichR on July 30, 2012 at 3:18am

We got our first of three separate tax year bonus payments in November.  Having not payed in the 110% estimated taxes because we didn't know we were going to be leased in that year.  Thus we did the schedule showing when we received the income to prevent the penalty.

Permalink Reply by Bluflame on July 30, 2012 at 3:23am

Bad payment timing! (but better than no bonus payments!)

BluFlame

Permalink Reply by Archer Man on July 29, 2012 at 3:05pm
All:

This is very helpful. I'll have to do some more research. Thanks for the good advise!

Cheers!
Permalink Reply by Feenzis on July 29, 2012 at 4:46pm

It is *unearned* income - so you do not have to pay social security or medicare on it if you get the money in 2012 - Obamacare tax will change that for 2013.  However, since it is "unearned" you also cannot do many of the things with it that you can do with your ordinary income to shelter it--such as 401k, retirement plan contributions.  We saw four different financial planners, two tax attorneys and our great CPA and they all confirmed that "the evil rich" really don't enjoy all manner of secret tax deductions; our taxer-in-chief just does a great job of creating class warfare.  Anyway, we opted to pay all the tax right away just to get it over with, and we're glad we did since our investments didn't do so hot and we would've probably actually lost some of the money if we had invested it all.  YMMV.

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