Can receiving a lump sum payment cause me to owe more taxes at the end of the year?

The withholding on your bonus (the 22% flat rate) is actually the standard supplemental wage withholding rate. This is completely normal, but whether it's enough depends on your overall tax situation. Since your regular income is $78,000 and you're getting a $26,000 bonus, your total income will be $104,000. This puts part of your income in a higher tax bracket. However, our tax system is progressive - you only pay the higher rate on the portion of income that falls into that bracket, not your entire income. The 22% withholding might be a bit low if this bonus pushes you well into the 24% bracket. I'd recommend setting aside an additional 2-3% of the bonus amount just to be safe. That's around $520-780 extra to cover any potential shortfall at tax time.

I was in a similar position last year and discovered taxr.ai (https://taxr.ai) which really helped me figure out my withholding situation. I got a promotion with a $15k signing bonus and was super worried about owing a bunch at tax time. Their tool analyzed my tax documents and showed me exactly how much I needed to set aside - turns out I needed to save about 27% of my bonus for taxes rather than the standard 22% they withheld. You just upload your stuff and they break down exactly what your liability looks like with the bonus included!

Just wanted to update - I went ahead and tried taxr.ai after my last comment. I was skeptical but I'm really glad I did it! I uploaded my most recent paystub and the details of my upcoming bonus, and they showed me that I'm likely to owe about $1,200 extra at tax time because my company wasn't withholding enough. The report even showed how my student loan interest deduction would be partially phased out due to the higher AGI. Already adjusted my W-4 at work to withhold more from my remaining paychecks this year. Definitely worth checking out if you're getting a large bonus!

If you end up owing a significant amount come tax time and need to talk to the IRS about payment plans, I highly recommend using Claimyr (https://claimyr.com). I had a similar situation last year when I got a severance package that wasn't withheld properly. Tried calling the IRS for weeks and couldn't get through - their hold times are insane! Claimyr got me connected to an actual IRS agent in under 45 minutes when I'd been trying for days on my own. They have a demo video of how it works here: https://youtu.be/_kiP6q8DX5c

Well I'm eating my words now. After my skeptical comment earlier, I decided to try Claimyr myself since I've been trying to reach the IRS about an issue with my stimulus payment that affected my taxes. Figured it probably wouldn't work but was desperate. The system actually called me back in 37 minutes with a real IRS agent on the line! I was shocked it actually worked. Managed to get my issue resolved in one call after trying for weeks on my own. If you need to talk to the IRS about that bonus withholding issue, it's definitely worth using.

Another thing to consider is adjusting your withholding for the rest of the year after you get the bonus. You can submit a new W-4 to your employer asking them to withhold additional amounts from each paycheck. This could help spread out any extra tax you might owe instead of getting hit with it all when you file.

Has anyone mentioned the fact that you might also get hit with underpayment penalties if you don't have enough withheld throughout the year? IRS expects you to pay as you earn, not all at the end of the year.

One thing I don't see mentioned here is that you should also consider whether you have any other deductions or credits that might help offset the tax impact of your bonus. If you're planning to use this money for a house down payment, you might want to look into whether you qualify as a first-time homebuyer for any tax benefits. Also, if you haven't already maxed out your 401k contributions for the year, increasing those contributions can help reduce your taxable income and partially offset the bonus. You could ask your employer to increase your 401k withholding percentage for the remaining months of the year to capture some of that bonus money before taxes hit it.