Inflation, taxes hit autoworker bonus pay
Profit-sharing check won’t buy as much as it once did
Inflation takes an ugly toll on our buying power as consumers. That’s true even if you receive one of the outstanding bonuses being handed out to hourly workers in the auto industry in 2023.
When it comes to taxes, though, inflation might oddly give those who receive a bonus or profit-sharing check this year a bit of a surprising break.
This week, UAW-represented workers at General Motors Co. learned that they’re in line for the highest profit-sharing check ever – hitting up to $12,750 before taxes are withheld. That’s more than the $10,250 profitsharing bonus that GM paid out last year and a bit above the previous $12,000 record for profit-sharing checks issued in 2017.
About 42,300 hourly employees at Detroitbased GM will receive their money in late February.
Ford Motor Co. announced its earnings results late Thursday and UAW-represented employees will get profit-sharing checks averaging $9,176 in 2023 – up from $7,377 in 2022.
The Ford payout is close to the record of $9,300 for Ford profit-sharing checks issued in 2016, based on 2015 earnings. This year’s payout is to be distributed March 9 to eligible employees. Ford has 56,000 hourly workers.
In general, Ford and GM pay about $1,000 in bonus money to UAW workers for each $1 billion in pretax North American profit. The formula at Stellantis is slightly different, based on profit margins. The Stellantis formula is $900 for every 1% of profit margin generated in North America.
On Feb. 22, Stellantis NV will release its earnings for 2022 and workers there will learn how much money in profit-sharing they’re set to get this year. In 2022, UAW-represented workers at Chrysler-parent Stellantis saw up to $14,670 in profit-sharing checks before taxes – a record amount in 35 years of such checks.
How inflation hits your bonus
When everything from grocery prices to airline tickets to car prices has spiked in the past year, any bonus won’t buy nearly as much as it would a few years ago.
A quick calculation: What cost $12,750 in February 2021, for example, would cost nearly $14,388 in December 2022, according to the CPI Inflation Calculator online at the U.S. Bureau of Labor Statistics.
Put another way, if you spent $1 in February 2021, you’d have to spend $1.13 in December 2022 to get the same item.
“In both cases, you’re looking at about 13% inflation between February 2021 and December 2022,” said Omair Sharif, founder and president of Inflation Insights in Pasadena, California.
No one, of course, is going to grumble about getting a fivefigure bonus.
Until they start talking about the taxes.
And many autoworkers consistently complain year after year that they’re really not getting as much as the headlines related to profit-sharing checks proclaim.
Taxes withheld reduce take-home pay
For hourly GM employees, the rate of federal withholding for UAW-represented profit-sharing payments will vary based on how the individual worker set up W-4 withholdings for their taxes on regular paychecks.
The federal withholding for profit-sharing is based on the W-4 form filed by individual employees to indicate the amount of tax to be taken out of each paycheck, just like regular pay, according to a GM spokesman David Caldwell.
For salaried GM employees, the federal taxes will be withheld on bonuses at the flat supplemental rate of 22%, Caldwell said.
Ford declined to disclose how the withholding for federal income taxes will be handled for the profit-sharing money.
And then more money is withheld upfront for Social Security, Medicare and other taxes, including state taxes, like income taxes in Michigan and other states.
Typically, many workers in a variety of industries who receive a one-time bonus can see federal income tax withheld at a
flat 22%.
At Stellantis, profit-sharing checks are subject to a flat 22% federal income tax withholding, plus withholding for normal state and local taxes, FICA or federal payroll taxes, deferred pay plan contributions and other legally required deductions, according to Stellantis spokeswoman Jodi Tinson.
The IRS approves two different types of withholding on bonuses, according to Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.
The normal percentage method involves the issuance of a separate bonus with 22% withholding, Luscombe said. The alternative aggregate method involves issuing the bonus as part of the regular paychecks and then the combined amount is subject to the normal paycheck withholding tables, which could be higher or lower than 22% depending on factors such as the amount of pay and the information submitted on the Form W-4 by the employee.
How inflation will impact next year’s taxes
This year, many people might not realize that the tax bite itself might be less painful when you receive a bonus or profitsharing check, thanks to new, higher federal income tax brackets and a higher standard deduction for 2023.
The annual inflation adjustment to tax brackets is something many of us can easily gloss over. But the change is significant after the sizable inflation we saw in 2022.
Tax brackets and the standard deduction are automatically adjusted each year to avoid “bracket creep” when inflation ends up driving taxpayers to pay more in taxes even though their purchasing power has been falling. The Economic Recovery Tax Act of 1981 included inflation adjustments for tax brackets starting in 1985, according to the Tax Foundation.
In Michigan, and many other states, the state income tax brackets are adjusted for inflation too.
Changes in tax brackets and a higher standard deduction mean that less of the money you make is treated as taxable income and, many times, your extra cash won’t fall into a higher tax bracket as quickly.
Take a general example of a couple who are married and filing a joint return. Let’s say their income was $65,000 and then a bonus of $10,000 was received. Assume the same bonus and income for 2022 and 2023.
Adding a $10,000 bonus on top of $65,000 in regular income could cost a taxpayer roughly $248 less in federal income taxes on 2023 returns than 2022 returns – simply because of how the tax brackets are adjusted for inflation in 2023, according to calculations by Jackson Hewitt.
“If you did not make any more money from 2022 to 2023, taking into account the new rate brackets adjusted for inflation, a taxpayer earning the same would owe less in taxes in 2023 than 2022,” said Mark Steber, chief tax officer at Jackson Hewitt Tax Service.
Again, we’re talking about situations where nothing else has changed – no new tax rule changes, no changes in your life, no extra profit from a side gig or income from virtual currency activity and no changes at the state level for taxes.
In our example for someone making $65,000 in wages and a $10,000 bonus, the married couple filing a joint return would pay $5,236 in federal income taxes on the wages and the bonus when they filed a 2023 tax return next year. This example assumes no children.
By contrast, they’d pay $5,484 in taxes when they’d file a 2022 tax return this year. How much they’d actually owe or receive in a tax refund would depend on how much they had withheld in taxes.
For a single filer with a dependent filing as head of household making the same wages and bonus, the tax savings for 2023 would be slightly less at about $216. That taxpayer would pay $6,382 in federal income taxes for 2022 and $6,166 in federal income taxes for 2023.
Someone who is single with no children will save money, too. A taxpayer who is filing single with no dependents would be looking at roughly $513 in tax savings on the 2023 return in this situation. That single filer would pay $9,274 in federal income taxes in 2022 and $8,761 in federal taxes in 2023 on that same level of income and bonus.
Again, Steber noted, all situations are going to vary based on things like how much money you save pretax in your 401(k) plan to lower your taxable income, how many children you have, what other types of income from odd jobs or capital gains might be added on the return and other factors.
Luscombe agreed that the higher tax brackets overall can help reduce the tax hit for many people when they file a 2023 return next year, including families with children.
A married couple with two children who qualify for the child tax credit, Luscombe said, would pay federal income taxes of $1,245 for 2023 if their income was $65,000 and they received a $12,750 profit-sharing bonus in 2023. That’s down roughly $566 from an estimated $1,811 in taxes in 2022 for the same incomebonus scenario last year. This example assumes no other deductions or credits, other than the child tax credit.
How tax brackets work
Taxpayers should keep in mind that there are seven different federal income tax brackets. They are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Those rates are the same for 2022 and 2023.
What’s different for tax year 2023 is when the money you make will be taxed at various rates. The 2023 tax brackets are already set into place and were announced by the Internal Revenue Service in October 2022.
Historically high inflation influenced more than 60 tax provisions, including tax rate schedules for 2023. The adjustments are based on the Chained Consumer Price Index average each month from August 2021 to September 2022.
For a married couple filing a joint 2022 return, for example, the first $20,550 in taxable income is taxed at 10%, the rate goes up to 12% for amounts over $20,550 and then goes up to 22% for amounts over $83,550.
On a 2023 return for those couples, the first $22,000 is taxed at 10%, the rate goes up to 12% for amounts over $22,000 and then hits 22% for amounts over $89,450.
Higher rates apply as incomes go up. For 2023, the top tax rate of 37% would impact incomes above $693,750 for married couples filing jointly. For individual single taxpayers, the 37% bracket applies to income greater than $578,125 in 2023.
Other inflation adjustments for 2023 tax returns, which will be filed in 2024, are already known. The standard deduction for married couples filing jointly for tax year 2023 goes up to $27,700 – an increase of $1,800 from what’s allowed on 2022 returns filed this year.
For single taxpayers and married individuals filing separately, the standard deduction is $13,850 for 2023, up $900 from 2022. For heads of households, the standard deduction is $20,800 for tax year 2023, a gain of $1,400 from 2022.
Knowing that you’re getting a sizable bonus early in the year can help you do some tax planning. If you’re not saving the maximimum in a 401(k) already, you might want to bump up those pretax contributions during the year to reduce your taxable income.
“From a tax perspective, the first priority might be to increase or maximize the contribution to a 401(k) plan, if available,” Luscombe said.
Contributing on pretax basis to a 401(k) throughout the year on your paychecks would lower your gross income and overall taxable income for a year. The maximum 401(k) contribution for an employee in 2023 is $22,500 – and then there’s the possibility an additional catch-up contribution of $7,500 if you’re age 50 or older. Those 50 and older could contribute up to $30,000 in 2023.
Anyone who gets a big bonus or profit-sharing check now might want to talk it over early in the year with their tax professional to make sure they’re on track when it comes to filing their 2023 returns next year.