If you Make 6 Figures, You’re Getting 2 Bonuses Next Year

by Darwin on December 12, 2010

Look Kids! --> Free Money!!!

There were two recent developments that have locked in 2 additional bonuses for 6 figure earners in 2011.  Aside from the framework tax deal Obama announced last week which left tax rates alone for all earners, the payroll tax reduction of 2% and the locked cost-of-living adjustment on Social Security means the cap at which employees pay into the system remains fixed for the third year in a row.  Let me explain how both of these translate into a significant bonus for high earners next year – and some suggestions on what to do.

Payroll Tax Holiday

Since the normal employee payroll tax is 6.2% and it will be reduced to 4.2%, this amounts to a $2000+ bonus in 2011 (after-tax money).  Once hitting the FICA limit below that tax is phase out anyway, but that’s an extra $2000 on income earned even if you don’t make that much.

2011 FICA Tax Limit

Just like 2009 and 2010, the limit at which employees stop contributing toward this will be $106,800.  So, for any earnings after $106,800, you’re essentially get a “bonus”  of 6.2% of your earnings in your paycheck through the remainder of the year.  Since generally, wages have increased over the prior years, but this cap hasn’t increased, this bonus is increasing each year.

Example Earner – $130,000 in 2011

This earner would see the full 2% additional bonus on the first $106,800 earned ($2136) and then a 6.2% bonus on the income earned from $106,800 up to $130,000 ($1438) for a total bonus of  $3574 in 2011.

What To Do With Your Bonus?

A nice way to avoid squandering this one-time windfall would be to adjust 401(k) contributions or IRA contributions to reflect the specific increase in the monthly earnings you’ll see as a result of the payroll tax break.  This way, it’s invisible to you, you’re not tempted to spend it and it basically went right into your retirement account.  You’ll be able to look back in 20 or 30 years (if you’re young) and say you took that unexpected one-time bonus and parlayed it into a $35,000 or so bonus in retirement.

If you’re carrying high interest credit card debt, this extra money would be well-spent in paying that down.  Perhaps you want to pay down your mortgage early or invest in your side business.  Or perhaps you’re going to be a “patriotic American” and spend it stimulating the economy :>

Regardless of whether you make six figures or not, you’ll be enjoying at least the payroll tax deduction next year.

What Will You Be Doing with Your Bonus?

{ 21 comments… read them below or add one }

Roger Wohlner December 12, 2010 at 6:35 pm

Great post. I like the idea of taking this savings and upping your 401(k) contribution. In fact some companies allow employees to automatically increase the amount deferred each year. A good idea even in years when there is no “bonus.”

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Samurai December 12, 2010 at 6:55 pm

Good stuff! Can you do me a favor what the savings would be with income of $550,000, $750,000, and $1,000,000? Pls include the FICA and savings forthe top income tax bracket not going up by 3.6%.

I just wonder about income phase outs.

Thx!

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Darwin December 12, 2010 at 7:00 pm

Hi Sam, you can hit those w a spreadsheet any time. In your example just the additional 6.2% times the spread btw 106,800 and your desired salary. Note that this cap exists every year so those high earners always got that extra bonus. I felt worth highlighting for those just over the 106800 since salaries have likely increased while limit is flat 3 yrs now (so the bonus grows each year!).

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Financial Samurai December 12, 2010 at 9:49 pm

Sorry, help me out, what spreadsheet?

FICA limit is $106,800, so even if you make $1 million.. it’s not like you get more back right, since the amount above $106,800 isn’t taxed anyway. Please correct me if I’m wrong, and let me know what savings I got for those 3 income levels pls :)

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Darwin December 12, 2010 at 10:19 pm

You’re a bright guy Sam, you can figure it out! I’m not gonna rehash the same reply; take a read through again and I’s sure you’ll get it.

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Financial Samurai December 12, 2010 at 10:25 pm

Your example doesn’t make sense. Notice how the only person talking numbers is me. And, if I’m confused, maybe, just maybe other people are confused.

Have you ever thought that maybe what you’ve written is unclear? And to shrug off a reader’s question by saying “figure it out” is weak and uninviting.

Darwin December 12, 2010 at 11:04 pm

Sam, (replying to your comment below since software ran out of embedded replies).

You came here to bust my chops and then pretend I’m not replying to your question with due respect. What’s “weak and uninviting” is the manner in which you conducted yourself here. If you have a question, ask it. You posted this:
“Can you do me a favor what the savings would be with income of $550,000, $750,000, and $1,000,000?”

You asked for a “favor” instead of openly admitting you either disagree or don’t understand. That is much different than saying “I don’t understand, please explain it differently”. So, rather than you asking for a favor and seeking calculations for multiple arbitrary numbers you could do yourself with a calculator or excel, what you really meant to say finally came out in your last reply: “Your example doesn’t make sense.” So, just be up front and honest rather than being coy if you’re going to criticize my post. Note I was much more eloquent in pointing out significant errors in your recent posts. Regardless…

So, I’ll humor you. Regardless of which of those numbers you pick, the following 2 concepts apply – which result in a “bonus” for anyone making $106,800 or more in 2011.

Payroll tax break – since absent from Obama’s recently announced framework, everyone would be paying 6.2% but now they’ll be paying 4.2%, that is 2% off of the $106,800. That is ($2136)

No COLA Increase – Since there was no cost of living adjustment last year, the cap at which you stop paying FICA taxes is stuck at $106,800. If you go back several years, this number used to just a few thousand dollars every year, so if the cap was 94K and you made 93K that year, you paid 6.2% on ALL your earnings that year. Then, great, you got a raise to 96K. But the cap went up to 97K. So, you paid the full 6.2% again and so on. Well, in recent years, including for 2011, this $106,800 hasn’t budged. So, rather than the cap moving up which it historically has, the cap is steady while you likely saw a raise (very few 6 figure earners that have retained their job got no raise over the past 3 years). So, this is bonus #2. You get more back in your last few paychecks each year. This concept is applicable to your example earners and like I said, if you are asking for specific numbers, calculations, whatever, knock yourself out with a spreadsheet, you’re more than capable.

Now, after re-reading, please explain which part specifically doesn’t make sense so I can clarify for you if still unclear.

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Financial Samurai December 12, 2010 at 11:27 pm

Not busting your chops at all. I asked for a simple favor on my commute back from my tennis match and hoping you would help me out. I guess I’m really slow, b/c I still don’t know what savings I’m getting if I make $550,000, $750,000 or $1,000,000. Just pick one and run the numbers with simple math so I can understand, since I’m of the belief there’s no bonus b/c one doesn’t pay the FICA tax over $106,800 anyway.

If you can’t answer the question, that’s fine. I’ll move on.

Invest It Wisely December 12, 2010 at 8:14 pm

Taxes going up here in Canada :(

If i was down thre, I would invest or pay down debt for sure… Probably wouldn’t spend it on anything that depreciates in value.

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Darwin December 12, 2010 at 11:06 pm

Curious, what’s the high level tax picture look like in Canada. Was there an outright tax increase across all brackets? Some sort of new tax enacted? Every country seems to be taking different approaches; with the US being the only one going in this direction it appears. It’s austerity everywhere else, spend like a drunken sailor here…

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MT December 12, 2010 at 11:25 pm

I like the extra 2%, but I am concerned about taking income away from SS.

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Darwin December 12, 2010 at 11:52 pm

Sam, for your comment dated: December 12, 2010 at 11:27 pm

It appears as though you’re focused on FICA and not the payroll tax then.

Then, that one is the point that since FICA limit did not increase this year, which it normally does, any one of those incomes stops paying at 106,800 instead of say, 109,000 or whatever the typical annual increase is. So, the 6.2% of the difference is a “bonus”.

OK, we beat to death. hope that did the trick.

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Financial Samurai December 12, 2010 at 11:55 pm

I just want to know what the savings/bonus would be on $550,000, $750,000, or $1,000,000. Still no answer.

Guess you don’t know, which is fine. Just say so, instead of running circles around the topic! It’s OK if you don’t know, and there’s no easy spreadsheet to link to and plug in, b/c I don’t know either, which is why I’m asking!

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Darwin December 13, 2010 at 12:07 am

Dude, you make me wonder some times.
If you need it spelled out in a nifty equation, here it is. (109,000-106,800)*.062 = an extra $136 above and beyond the “bonus” of not having to pay when they hit 106800 anyway. This assumes that people should have expected the cap to increase annually, but it didn’t. If you factor in that it hasn’t increased twice now, double it to $272. This same answer applies to all your income examples above.

Make sense?

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Financial Samurai December 13, 2010 at 12:32 am

OK. So if I make $1,000,000, then my “bonus” is $272 on top of $2,136 even if I make $1,000,000. So, in that case… it’s nothing.

Yet, your example is consistent what you write below, coming up with $3,574. It is very unclear, and I can pretty much promise you that your average reader will be confused by what you are writing.

Example Earner – $130,000 in 2011

This earner would see the full 2% additional bonus on the first $106,800 earned ($2136) and then a 6.2% bonus on the income earned from $106,800 up to $130,000 ($1438) for a total bonus of $3574 in 2011.

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Darwin December 13, 2010 at 12:43 am

I think people will get the concept, which is the point.

And for your 1 Million dollar earner? That’s not a six figure salary :>

Financial Samurai December 18, 2010 at 12:13 am

See how much easier my explanation is of the payroll tax cut on my site today?! :)

Cheers

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Darwin December 18, 2010 at 12:45 am

Oh yes, clear as mud :)

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jaybandit January 27, 2011 at 11:06 am

Darwin,

A bonus implies something new or extra. The money earned above the cap has always been untaxed, so it isn’t a new bonus for those making 6-figures. You are using examples of people who make just around the limit, but someone making say $200k a year isn’t going to say “wow i had a big bonus this year”, they would just notice the tax didn’t increase. You’re implying that someone making $130k is getting an additional bonus of $1438 this year; however, they’ve gotten that money the past few years, and something slightly more in years prior.

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Darwin January 27, 2011 at 11:19 am

As I pointed out though, the FICA cap normally increases each year with inflation but has held steady 3 years in a row now. So, for someone making say, 112K this year, in years past they would probably always be at the threshold and never breach the limit. But now, and each year forward, they now get this bonus as long as their salary keeps pace with inflation.

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Ace Ventura, Pet Detective June 7, 2011 at 6:34 pm

Math sucks…Always has, always will…

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