Congratulations on receiving your first signing bonus payment. But, I’m guessing you are wondering if the team withheld too much tax or not enough. To make matters worse, what the team withholds is most likely different than what you will actually owe. Understanding your first paystub can be confusing which is why we have put together this guide.
Federal Treatment of Signing Bonuses
All signing bonus payments are treated as supplemental wage payments and are subject to federal income tax withholding and payroll taxes. Generally, federal income tax withholding for supplemental wage payments is 25% up to the first $1 million and 35% thereafter. However, teams may vary on the % they withhold. For the majority of players this means that the team did not withhold enough tax and you will owe an additional amount with your tax return.
State and Local Treatment of Signing Bonuses
Contingent Signing Bonuses
Contingent or refundable, signing bonuses are treated like regular wage payments and are subject to apportionment in all jurisdictions for major and minor league players.
State Tax Apportionment / Withholding Processes:
- Federal and FICA taxes will be withheld at the time the signing bonus is paid.
- How each team handles state tax withholding varies dramatically. It could be a combination of the state you are assigned to and your resident state or a few teams do not withhold any state tax at all. However, once again you as the tax payer are responsible for paying in the correct amount. Depending on where you live, you may or may not be required to pay a state income tax.
Social Security Tax
- The federal government requires every working American to contribute a portion of their paycheck to Social Security, a system of supplemental retirement programs established in 1935. Every worker contributes 6.2% of their gross income directly into the Social Security fund, and every employer chips in an additional 6.2% for each employee. The Social Security fund provides benefits to current Social Security recipients. There is a cap set each year on the amount of income subject to Social Security taxes. In 2017 the cap is $127,200. If your income exceeds this amount you will pay a total of $7,886.40 in social security tax.
- The federal government requires every working American to contribute to Medicare, a U.S. government insurance plan that provides hospital, medical, and surgical benefits for Americans age 65 and older and for people with certain disabilities. Every worker contributes 1.45% of their gross income to Medicare and every employer chips in an additional 1.45% on behalf of each employee.
- On Nov. 26, 2013, the IRS issued final regulations (TD 9645) implementing the Additional Medicare Tax as added by the Affordable Care Act (ACA).
- An individual is liable for Additional Medicare Tax if the individual’s wages, compensation, or self-employment income (together with that of his or her spouse if filing a joint return) exceed the threshold amount for the individual’s filing status:
- The rate is 0.9 percent.
|Filing Status||Threshold Amount|
|Married filing jointly||$250,000|
|Married filing separate||$125,000|
|Head of household (with qualifying person)||$200,000|
|Qualifying widow(er) with dependent child||$200,000|
What Should You Do?
No one likes surprises at tax time. It is highly recommended that your Certified Public Accountant (CPA) prepares a tax projection. This will provide clarity on how much you will either owe or receive next April. In addition, there are multiple tax savings strategies that you should be taking advantage of that will significantly reduce your taxes. If you would like more information on what can be done to reduce your taxes or would be interest in having us prepare a tax projection we would love to hear from you.