How to give an employee a bonus without taxes (2024)

You can not give an employee a bonus without taxes. The IRS specifically states that taxes must be withheld from all employee bonus payments at the standard federal withholding rate if the bonus is paid along with the employee's regular wages or at the supplemental rate of 22%.

While there is no legal way to give an employee a bonus without taxes, there are ways employees can minimize the taxes they pay on their bonuses. Here are some strategies to help lower the amount of taxes you need to pay on a bonus:

• Use deductions. You can use several different types of deductions to lower the taxes you must pay on a bonus. The only requirement is that they must be itemized deductions. Here are some examples:

• Charitable contributions. Using this option depends on the size of your bonus. You could make a charitable contribution equivalent to several years' worth if the bonus is high enough to take full advantage of the charitable contribution deduction strategy.

• Medical expenses. These can be itemized if you have very high medical expenses. Those with medical expenses at 7.5% or above their gross income can use this strategy to lower the taxes on a work bonus.

• Mortgage interest. Mortgage interest can be deducted from up to $750,000 of mortgage-related debt on a primary or second home.

• Increase the amount you contribute to your 401(k). You can also choose to increase your 401(k) contributions. When doing this, you could use your entire bonus amount or just a portion of it.

  The most optimum method and when you should execute this action depends on your situation and when you receive your bonus payment. This option is great for future and retirement planning.

• Increase the amount you contribute to your traditional IRA. This is yet another way to lower your taxable income when you receive a bonus from your job. Contributing to your traditional IRA account.

  You do this by deducting those contributions from your pre-tax income. Then, as a result of that action, the amount of income you are taxed on is lowered and helps to even out any financial tax hit you might take from your bonus.

• Tell your company to combine your bonus check with your normal salary. Some companies will do this without you asking them, while others might only take this action if you request it.

  The advantage of this option is that when your bonus gets taxed, it is taxed on your regular withholding and is therefore not vulnerable to the 22% mandated rate from the IRS concerning supplemental income.