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HOW ARE BONUSES TAXED?

Congratulations! But how does the IRS view it?

happy man with bonus check

Bonuses are often an exciting component of one's compensation, but like all good things, they come with their tax nuances. Let's demystify the taxation surrounding bonuses and equip you with the knowledge you need.

Understanding the Basics of Bonuses

Q: What exactly are bonuses in the context of employment?
A: Bonuses are supplementary payments given to employees over and above their regular salary. They might be awarded for stellar performance, tenure, or achieving specific goals. They can be both discretionary or based on contractual obligations.

Q: How is a bonus different from regular wages or salary?
A: A regular salary or wage is a fixed amount you receive, typically bi-weekly or monthly, for the services you provide to your employer. Bonuses, however, are one-off payments that might vary in amount and aren’t guaranteed.

Taxation of Bonuses

Q: How are bonuses taxed?
A: Bonuses are considered "supplemental wages" in the eyes of the IRS. There are two primary methods to tax bonuses: aggregate and percentage.

    • Aggregate Method: Your bonus is combined with your standard wage. The total is then taxed based on the tax brackets.
    • Percentage Method: Your bonus is taxed separately at a flat rate of 22%, as of the current IRS guidelines.

Q: Are state taxes applicable to bonuses?
A: Yes. Bonuses are subject to state taxes in states that levy income taxes. It's vital to check with your state's tax department or your employer's HR for specific information.

Q: Who is responsible for withholding and paying these taxes?
A: Employers hold the primary responsibility for withholding the correct tax amount from bonuses and sending it to the IRS. If under-withheld, you, the employee, would need to make up the difference during tax filing.

Q: Can employees influence how their bonuses are taxed?
A: In some cases, yes. If your employer allows it, you might have the option to choose between the two tax methods. Both have their advantages, so it’s essential to understand each one before deciding.

Strategies and Implications

Q: Are there strategies to minimize taxes on bonuses?
A: Indeed, there are. You could consider deferring a bonus to another year with expected lower income, or perhaps increasing contributions to retirement accounts. Consulting a tax professional can yield personalized strategies.

Q: What if my employer doesn't withhold enough tax from my bonus?
A: In cases where employers under-withhold, employees must make up for it during tax filing, potentially by making estimated tax payments.

Q: How does the bonus tax rate compare to regular income tax rates?
A: The bonus tax rate can either be similar or different from regular rates, depending on the withholding method applied and your total annual income.

Q: Can a bonus bump me into a higher tax bracket?
A: Yes, receiving a substantial bonus could elevate your income level, potentially placing you in a higher tax bracket for that year.

Q: Are there exceptions where bonuses might be taxed differently?
A: High-value bonuses can face a 37% tax rate beyond a certain threshold. The specifics depend on current IRS guidelines.

ASK LIBERTY TAX ABOUT BONUSES

Bonuses and their tax implications can be intricate. But, with Liberty Tax by your side, you're never alone in this journey. For tailored insights and expert advice, schedule a session with a Liberty Tax professional today. Whether face-to-face or online, we're here to guide you every step of the way.