How bonuses are taxed on draft day
It’s draft day for the NFL. Over the next three days 256 NFL prospects will hear their name called by one of the 32 NFL teams. Many of them will get a signing bonus. The top draft pick in 2017, Myles Garrett, collected a $20.3 million signing bonus from the Cleveland Browns, which, if taxed at the highest 2017 tax rate, meant a federal income tax bill of more than $8 million. The last pick of the first round, Ryan Ramczyk, who went to the New Orleans Saints received a $4.6 million signing bonus with an estimated $1.8 million federal income tax bill.
It’s not just the NFL draftees who need to think about the taxes due on their bonuses. Anyone who receives a bonus is going to owe taxes on the bonus and could have some strange changes to their paycheck.
How bonuses are taxed
For the NFL draft picks, any bonus that exceeds $1 million will be taxed at a marginal rate of 37 percent, the highest 2018 tax rate on ordinary income like salaries. For the No. 1 draft pick, that means more than $8 million in federal taxes alone, assuming an expected signing bonus of over $22 million.
For the players who are picked up in the later rounds and get significantly less of a signing bonus, it’s how they receive it that will determine how much tax they must pay. The same goes for people who receive a holiday or annual bonus.
Player bonuses are also subject to a state income tax if the state where the team is based imposes one.
How bonuses are paid
Bonuses paid with a salary, and not separately identified, will be taxed at the same rate as wages. But if the bonus is paid with a regular paycheck, the withholding table will calculate the taxes due as though the extra-large paycheck will be the amount paid each paycheck for the remainder of the year, so the withholding may be higher than necessary to cover the actual tax liability on the bonus.
If the bonus is paid separately, it will be taxed at a flat rate of 22 percent if bonuses paid to the employee throughout the year total less than $1 million. The employer can also choose to treat the bonus as though it were paid with other wages to determine the tax rate. Either way, getting a bonus will increase the withholding for that paycheck.
Taxpayers who receive a gift from their company on special occasions, a holiday ham or birthday flowers for example, will most likely not be taxed on this gift. This is often referred to as a “de minimis fringe benefit” and is not included in income. In most instances, the employer will decide whether the gift is a de minimis fringe benefit. Cash and cash equivalents, such as gift cards, no matter how low in value, are taxable to the employee.
While it remains to be seen how any of these draft picks will pan out over the coming years, there will be 32 new millionaires by Thursday night who combined will owe the IRS $116 million based on signing bonuses alone.