Year-end bonuses are coming: Don’t be surprised how they’re taxed (2024)

FAQs

Year-end bonuses are coming: Don’t be surprised how they’re taxed? ›

The IRS considers bonuses to be supplemental income and taxes them at a flat withholding rate of 22% (a higher rate applies to bonuses over $1 million). Your employer can tax your bonus in one of two ways — the percentage method or the aggregate method.

By now, you may be wondering, “Why are bonuses taxed so high?” It's because the IRS considers bonus pay to be supplemental income. Therefore, the IRS treats it differently than your standard income.

Before you start making plans to spend it, it's important to understand how that income will get taxed. Yes, your bonus money is taxable—typically at a flat rate of 22%—and it's up to you to make sure the appropriate amount gets paid.

Yes. Bonuses are taxable income, but the IRS considers them supplemental wages, which means taxes may be withheld on your bonus differently than they are on your ordinary wages. Employers can either tax your bonus at a flat 22% rate or use a more complex withholding calculation.

Your bonus will be taxed, but you can lower the amount of your taxable income by depositing some or all of it in a tax-deferred retirement account such as a 401(k) or IRA. However, this does not mean you will avoid paying taxes completely.

How your bonus is taxed. Because the IRS considers company bonuses “supplemental income,” they are taxed just like any other income you make. Other types of payment that fall into the supplemental income category include commissions, overtime pay, tips, severance and payment for unused accrued time off.

The only way to avoid bonus taxes altogether is when your bonus is tax-exempt. However, you can sidestep taxes on a monetary or cash equivalent bonus by asking your employer for a bonus in another form.

Most employers withhold 22% of your bonus for income taxes. One way to keep more of your hard-earned money and reduce your bonus tax burden is to invest all or part of it in a tax-deferred account like a 401(k). The money you invest will effectively lower your taxable income for the year.

“If they just raise our salary, we're not going to be taxed so heavily on that. Plus there's no guarantee year-to-year what they're going to do,” she said. Bonuses can be taxed at a higher rate than normal wages, though there are some ways to mitigate that, and you might wind up getting a refund.

Why is my bonus taxed at 35 percent? ›

With the aggregate method, your employer or payroll provider will withhold federal taxes at the same percentage that's normally withheld from your paycheck. If 35% is withheld when you are paid, then your employer will withhold 35% from your bonus when you are paid your bonus.

One of the most effective ways to reduce taxes on a bonus is to reduce your gross income with a contribution to a tax-deferred retirement account. This could be either a 401(k) or an individual retirement account (IRA).

There's no legal way to pay employees bonuses without taxes.

That's because your regular and bonus pay are combined as a lump sum. As a result, the amount of tax taken from the check that includes your bonus pay is higher than what you're used to with your usual paycheck on your regular payday.

A bonus is taxed using a percentage method or an aggregate method. The flat tax rate for a bonus is 22%. You can minimize your tax burden by having your employer withhold taxes from each paycheck above your tax bracket, utilizing all available deductions, and taking advantage of qualified investments.

One of the most common end-of-year bonus delivery methods is cash or check from your employer. If your employer does this, the bonus amount should be added to the W-2 you receive in January. A cash bonus is treated similarly to wages, and is taxed as such. You will report the bonus as wages on line 1 of Tax Form 1040.

The amount of tax withheld from your pay depends on what you earn each pay period. It also depends on what information you gave your employer on Form W-4 when you started working. This information, like your filing status, can affect the tax rate used to calculate your withholding.

You cannot claim exemption for bonuses. Maybe your employer changed the payroll company or the payments were classified differently. What was your total income last year? No taxes would be withheld if total income + the bonus were bellow the filing/withholding requirement.