If you work as an employee, you’re probably used to having income tax withheld from your paycheck. When you get a bonus, however, there may be more confusion about how it’s taxed and what will be left over.
Here are the most important things to know about how bonuses are taxed.
At a glance:
Whether you receive a bonus in the middle of the year or at the end, your employer must withhold 6.2% for Social Security tax and 1.45% for Medicare tax. Those are the same values they withhold from every paycheck you receive. Your employer then matches those amounts and pays the IRS on your behalf.
Additionally, your employer must withhold federal and state income tax from your bonus. The bonus amount is also included with your other taxable salaries and wages on your Form W-2 at the end of the year.
Your employer can determine how much income tax to withhold in one of two ways:
When you get your Form W-2 next January, your bonus is already included in your wages and salaries in Box 1. You don’t need to do anything else to report your bonus to the IRS.
If you get small, non-cash bonuses from your employer, you don’t have to report them as income or pay tax on them. Nontaxable bonuses include things like sporting event tickets, holiday parties, and that giant tin of popcorn that takes a month to eat.
Be aware that calling something a “gift” doesn’t make it nontaxable, however. If your employer gives you $500 cash at Christmas, that’s a taxable bonus.
A little tax planning can help you keep more of your tax bonus – or at least make better use of it. For example, you could increase the amount you contribute to your 401(k) plan or other retirement account to offset the extra tax owed on your bonus.
You could also use part of the money to increase your charitable contributions or other deductible expenditures. If you itemize deductions, that will help reduce your total tax bill for the year.
If you want to have more or less income tax withheld from your bonus, you can ask your employer if they use the aggregate method or the flat percentage method. Depending on their answer, you may consider filing a new Form W-4 shortly before the bonuses come out to have less tax withheld from the bonus. TaxAct has a handy W-4 calculator that can help you fill out your W-4 form in the way that’s most beneficial for your goals and tax situation 1 .
You can also file a new Form W-4 after you receive your bonus to reduce the extra withholding. As a result, you’ll get more money in each paycheck for the rest of the year instead of waiting for it to come in the form of a tax refund.
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