Income and Investments Are Bonuses Taxed? How Bonuses Are Taxed and Treated by the IRS Read the Article Open Share Drawer Share this:Click to share on Facebook (Opens in new window)Click to share on Twitter (Opens in new window)Click to share on LinkedIn (Opens in new window)Click to share on Pinterest (Opens in new window)Click to print (Opens in new window) Written by TurboTaxBlogTeam Published Nov 9, 2017 - [Updated Oct 22, 2024] 5 min read Bonuses are an excellent way to motivate employees and reward top performers. However, bonuses can also quickly change one’s tax return and the amount of taxes initially withheld depending on the payout. Are bonuses treated as regular income or singled out for special tax treatment? Are some types of bonuses more favorable than others? And are there any ways to minimize the tax impact of getting a bonus? These questions are explored below. Bonuses are considered “supplemental wages” The IRS goes to great lengths to categorize different types of income and treat them differently, and bonuses are another example of this. In the eyes of the IRS, bonuses are typically categorized as “supplemental wages.” As a University of Minnesota summary explains: “The IRS defines supplemental wages as compensation paid in addition to the employee’s regular wages that includes, but is not limited to, severance or dismissal pay, vacation pay, back pay, bonuses, moving expenses, overtime, taxable fringe benefits, and commissions.” Are your bonuses taxed? If you recently received a bonus, you may be wondering — are bonuses treated the same as your taxable income, or are bonuses taxed differently? One way or another, bonuses are typically taxed, but how they are taxed and at what rate depends on the situation. Tax rates may also vary based on your tax bracket and the type of bonus you receive. So, how are bonuses taxed? We’ll take a closer look at that in the rest of this guide. Are bonuses taxed on the federal and state levels? Bonuses are usually taxed on both the federal and state levels, which means you have to report and pay taxes on your bonuses twice. However, supplemental income tax rules and rates can vary depending on the state you’re in. You can visit your state Department of Revenue website to learn more about how bonuses are taxed in your state. If you need help finding tax information for your state, you can use this state Department of Revenue directory. How are bonuses taxed? Bonuses (like other supplemental wages) are treated differently than ordinary wage or salary income when it comes to taxes withheld at payout. There are two ways of withholding taxes from your bonus: the percentage method and the aggregate method. Which method gets applied to your bonus? Let’s find out. The percentage method The IRS specifies a flat “supplemental rate” of 22%, meaning that any supplemental wages (including bonuses) should be taxed in that amount. If you receive a $5,000 bonus, under this rule, $1,100 (22% of $5,000) goes straight to the IRS. Using this approach, the amount of your bonus, whatever it is, is “singled out” from the rest of your income and taxed directly. Employers frequently choose the percentage method because it’s easier to tax the entire bonus at a uniform rate. In most cases, this is ideal from your standpoint as the bonus receiver and taxpayer, too. In addition to being more time-consuming and laborious for employers, the aggregate method (described below) can take a bigger tax bite out of your bonus payments. The aggregate method Unlike the much simpler percentage method, the aggregate method is used when your employer pays your bonus (say, $5,000) with your most recent regular paycheck. Then, they determine the normal withholding amount based on IRS withholding tables for the sum of both amounts, subtract what was already withheld from your last paycheck, and withhold the rest from the bonus amount. The problem with this approach is that instead of taxes being withheld at a flat 22%, and having that 22% rate applied only to the bonus amount, taxes are withheld at what is almost certainly a higher rate on the combined amount of your normal pay and the bonus. The result: a higher overall tax obligation initially for the same amount of income. Also, if your bonus puts you in a higher tax bracket this year, and you expect to make less next year, see if your employer can defer your bonus to lower your tax bill this year. Now, you might be asking, “Why are bonuses taxed so high?” and that’s understandable, but luckily, there are a variety of ways you can reduce your taxable income overall, like taking advantage of credits and deductions. What if my bonus exceeds $1 million? What about high-end corporate bonuses, like those exceeding $1 million or more? These are singled out for higher taxes. If you receive a bonus of more than $1 million, your employer must withhold 37% of the amount above $1 million, as well as the standard 22% of the amount below $1 million. In short, if you dislike the eye-popping bonuses top executives receive, you can take comfort in knowing how large a bite the IRS takes! No matter what method is used to withhold taxes from your bonus at payout, don’t panic. Remember, taxes may be withheld from your bonus at a higher tax rate at payout, but when you file your taxes at tax time, your actual tax rate is based on your total taxable income and overall actual tax rate, which may be lower. Depending on your taxable income, actual tax rate, and eligible tax deductions and credits, you may get some of the money withheld back in the form of a tax refund. When are bonus taxes paid? If you received a bonus from your employer, you don’t have to worry about withholding taxes or reporting additional income at the end of the year. Taxes from bonuses are usually withheld before you receive your bonus. What happens if you overpaid or underpaid taxes on your bonus? Even though you don’t have to withhold and pay taxes on bonuses manually, you can still overpay or underpay taxes on your bonus. If you overpaid your taxes, you could be eligible for a refund at the end of the year. However, you’ll only receive a refund if you have enough withheld for federal taxes and you don’t have any outstanding tax bills. If your employer doesn’t withhold enough when paying your bonus, you may have an unexpected bill when you file your taxes. You can also face penalties for underpayment in some cases. Fortunately, this usually isn’t a problem. Don’t worry about remembering all of this information come tax time, TurboTax will ask you simple questions about you and give you the tax deductions and credits you are eligible for. Are you lucky enough to get a bonus? Which tax method will your employer use? Previous Post 3 Tax Reasons for Why You Should Think Twice Before… Next Post Four Changes to Make This Year to Buy Your Dream… Written by TurboTaxBlogTeam More from TurboTaxBlogTeam 166 responses to “Are Bonuses Taxed? How Bonuses Are Taxed and Treated by the IRS” « Older Comments Newer Comments » Since the bonus is taxed at a higher rate than what your annual income tax bracket should be, do you get back the monies that were taken out because of the higher tax bracket the following years tax season? Reply TurboTaxLisa, What if we do a monthly bonus of $400.00? Do we have to do the 25%? Our bonuses are based on if they reach production. $100.00 for taxes does not seem fair for the employee. When we cut the bonus, we leave their regular tax rate in. Reply If I work in California, is there any state tax on Bonus or just the federal tax? Reply My dad’s tax accountant cannot understand why my husband’s bonus is taxed for Social Security & Medicare coming from the employer. He insists that if you are paid a bonus it should only be taxed for Federal Income, but not the other usual deductions applied to your payroll. Reply Your dad needs a new accountant! Reply is the bonus supposed to be taxed. I am just concerned. Every time my bonus is taxed while i am working on the public sector. how to calculate tax on your monthly income. Reply my employer gave me a 100.00 bonus with a separate check other than my payroll check and added it to my gross earnings and took out the taxes and then deducted it along with my medical and dental insurance and agreed,500.00 pay draw on the 15th of the month.Iget paid the last business day of the month. It seems like they gave me a bonus tthen took it back.confused in wa. state Reply agree time to change accountants Reply This is exactly what just happened to me , the company gave us a small bonus in a separate check bu ton by pay stubb it is shown as a pay advance and is deducted, so it looks like it was given to me as a bonus but them deducted from my check… Reply When you received the separate check, no tax had been calculated on it. So, it should be on your payroll check as an earning (so tax can be calculated on it). Then, it’s taken back out as a deduction because it was already paid to you on a separate check. Look on your payroll check stub or check with your payroll person to see if the bonus was included TWICE on your payroll check: (1) an earning (added to your check for tax calculations) AND (2) a deduction (removed from your check since you were already paid the bonus). I understand the flat 25% tax that is removed from a bonus, but should other taxes such as FICA, MEDI and others also be taken out? It feels like I am being double taxed, and that may be because I am. Thanks, MT Reply It is still income and should have all other taxes taken out. Bonuses are not exempt from other taxes. Reply as mentioned in one of the comments above, it is my understanding that regardless of which withholding method is used, at the end of the year bonuses are NOT taxed differently. they are added to income and the effective tax rate is a result of all income combined. for people in the 15% tax bracket their bonus will most likely be taxed at 15% or less. Reply Hi, Yes, your employer will deduct 25% federal withholding from your bonus when it is issued and then when you prepare your taxes the bonus will be added to your other income and all income will be taxed at your tax bracket. Thank you, Lisa Greene-Lewis Reply Hi Lisa, I receive my late father’s, Executive Continuance Salary. His former employer has now hired an outside company to do payroll. Now I’m no certain at all how this works, but they are telling me their company will now apply the 25% Supplemental Tax as that is the method they use for this type of income. It’s a fat $400. 🙁 Here is my ignorant question; will this mean that my tax return at the end of the tax year will me larger? Or is the Federal Government just getting a large chunk of my father’s hard earn money? I say ignorant in the literal sense. So please, people, don’t bash me. Hi Catherine, If the payroll company let you know they are taxing this income at 25% they will automatically deduct that amount. If you mean will your tax refund be larger this year, it will depend on your other income and deductions. The amount will go to you with the 25% already deducted, but the portion you receive will then be taxed at your tax rate, which is dependent on your total taxable income. I hope this helps you. Thank you, Lisa My apologies for all of the typos. I need to add that I have two siblings that these funds are equally distributed, and individually taxed. Thank you for your time. THe problem with this entire conversation is that you say “your employer” will tax you!! It is not th employer it is the FEDERAL GOVERNMENT MANDATING THAT HE OR SHE TAKE IT OUT AS HOMAGE TO THE ALMIGHTY FED!!!! Reply Is there a penalty on the company if it does not withhold 25% of the supplemental wage (the “Bonus”)? What if the employee wants to skip Federal Withholding on the Bonus because he knows that he will satisfy some of the safe-harbor testing (will pay at least 110% of last year’s taxes, etc.) requirements? Reply if my bonus for 2012 is pd in 2013 which year does it get added to my gross pay? Reply My 2011 bonus was paid to me in 2012, and it was added to my gross pay for 2012. The pay check where you got the bonus will show a higher number for gross income because of the bonus, it’s added to the tax year for that pay check. Reply The check date determine the FY, thus, if the check was issued in 2013, then it would be report on your 2013 w2. Reply Ok so what if the bonus is issued as a separate check and im in the maritime industry. Dont know how much its for but its waiting at the office for me. This is unique bc my bi monthly paychecks are directly deposited into my bank account. I wont get back on shore or even be able to pick up the check until maybe the 28th of dec if even that early. My question is what is the relevant date that this bonus will be part of my taxable income and then if i wait to cash it until Jan would that prevent it from being part of my 2013 income? Ive only been employed for half of the year and even if the bonus is only for say $100 it will almost certainly but me in the 2nd tax bracket. This of course won’t be an issue next year since I will be in the higher bracket regardless of the bonus check amount, and would be more beneficial this year if I could wait to claim it next year. Please help. It is part of your taxable income based on the date the bonus pay is issued – not when you actually pick it up or cash it. I am not a tax expert, but I agree with Gilbert. Some companies do this intentionally, so you save on taxes until the following year. It’s called deferred compensation. Reply « Older Comments Newer Comments » Leave a ReplyCancel reply Browse Related Articles Tax Planning How Bonuses Are Taxed: A Complete Guide Tax Planning Holiday Bonus Taxes Income and Investments Bonus Round: 5 Tips for Your Work Bonus Income and Investments A Visual Guide to Taxing Bonuses [Infographic] 401K, IRA, Stocks What Happens to Employees When a Company Goes Public? Income and Investments What Is Supplemental Income? Tax Tips The Tax Implications of Receiving a Holiday Bonus Investments Dividends and Taxes: An Intro Guide Self-Employed How Holiday Bonuses are Taxed for Contract Workers Work How Bonuses Received as a Contractor Are Taxed
Since the bonus is taxed at a higher rate than what your annual income tax bracket should be, do you get back the monies that were taken out because of the higher tax bracket the following years tax season? Reply
TurboTaxLisa, What if we do a monthly bonus of $400.00? Do we have to do the 25%? Our bonuses are based on if they reach production. $100.00 for taxes does not seem fair for the employee. When we cut the bonus, we leave their regular tax rate in. Reply
My dad’s tax accountant cannot understand why my husband’s bonus is taxed for Social Security & Medicare coming from the employer. He insists that if you are paid a bonus it should only be taxed for Federal Income, but not the other usual deductions applied to your payroll. Reply
is the bonus supposed to be taxed. I am just concerned. Every time my bonus is taxed while i am working on the public sector. how to calculate tax on your monthly income. Reply
my employer gave me a 100.00 bonus with a separate check other than my payroll check and added it to my gross earnings and took out the taxes and then deducted it along with my medical and dental insurance and agreed,500.00 pay draw on the 15th of the month.Iget paid the last business day of the month. It seems like they gave me a bonus tthen took it back.confused in wa. state Reply
This is exactly what just happened to me , the company gave us a small bonus in a separate check bu ton by pay stubb it is shown as a pay advance and is deducted, so it looks like it was given to me as a bonus but them deducted from my check… Reply
When you received the separate check, no tax had been calculated on it. So, it should be on your payroll check as an earning (so tax can be calculated on it). Then, it’s taken back out as a deduction because it was already paid to you on a separate check. Look on your payroll check stub or check with your payroll person to see if the bonus was included TWICE on your payroll check: (1) an earning (added to your check for tax calculations) AND (2) a deduction (removed from your check since you were already paid the bonus).
I understand the flat 25% tax that is removed from a bonus, but should other taxes such as FICA, MEDI and others also be taken out? It feels like I am being double taxed, and that may be because I am. Thanks, MT Reply
It is still income and should have all other taxes taken out. Bonuses are not exempt from other taxes. Reply
as mentioned in one of the comments above, it is my understanding that regardless of which withholding method is used, at the end of the year bonuses are NOT taxed differently. they are added to income and the effective tax rate is a result of all income combined. for people in the 15% tax bracket their bonus will most likely be taxed at 15% or less. Reply
Hi, Yes, your employer will deduct 25% federal withholding from your bonus when it is issued and then when you prepare your taxes the bonus will be added to your other income and all income will be taxed at your tax bracket. Thank you, Lisa Greene-Lewis Reply
Hi Lisa, I receive my late father’s, Executive Continuance Salary. His former employer has now hired an outside company to do payroll. Now I’m no certain at all how this works, but they are telling me their company will now apply the 25% Supplemental Tax as that is the method they use for this type of income. It’s a fat $400. 🙁 Here is my ignorant question; will this mean that my tax return at the end of the tax year will me larger? Or is the Federal Government just getting a large chunk of my father’s hard earn money? I say ignorant in the literal sense. So please, people, don’t bash me.
Hi Catherine, If the payroll company let you know they are taxing this income at 25% they will automatically deduct that amount. If you mean will your tax refund be larger this year, it will depend on your other income and deductions. The amount will go to you with the 25% already deducted, but the portion you receive will then be taxed at your tax rate, which is dependent on your total taxable income. I hope this helps you. Thank you, Lisa
My apologies for all of the typos. I need to add that I have two siblings that these funds are equally distributed, and individually taxed. Thank you for your time.
THe problem with this entire conversation is that you say “your employer” will tax you!! It is not th employer it is the FEDERAL GOVERNMENT MANDATING THAT HE OR SHE TAKE IT OUT AS HOMAGE TO THE ALMIGHTY FED!!!! Reply
Is there a penalty on the company if it does not withhold 25% of the supplemental wage (the “Bonus”)? What if the employee wants to skip Federal Withholding on the Bonus because he knows that he will satisfy some of the safe-harbor testing (will pay at least 110% of last year’s taxes, etc.) requirements? Reply
My 2011 bonus was paid to me in 2012, and it was added to my gross pay for 2012. The pay check where you got the bonus will show a higher number for gross income because of the bonus, it’s added to the tax year for that pay check. Reply
The check date determine the FY, thus, if the check was issued in 2013, then it would be report on your 2013 w2. Reply
Ok so what if the bonus is issued as a separate check and im in the maritime industry. Dont know how much its for but its waiting at the office for me. This is unique bc my bi monthly paychecks are directly deposited into my bank account. I wont get back on shore or even be able to pick up the check until maybe the 28th of dec if even that early. My question is what is the relevant date that this bonus will be part of my taxable income and then if i wait to cash it until Jan would that prevent it from being part of my 2013 income? Ive only been employed for half of the year and even if the bonus is only for say $100 it will almost certainly but me in the 2nd tax bracket. This of course won’t be an issue next year since I will be in the higher bracket regardless of the bonus check amount, and would be more beneficial this year if I could wait to claim it next year. Please help.
It is part of your taxable income based on the date the bonus pay is issued – not when you actually pick it up or cash it.
I am not a tax expert, but I agree with Gilbert. Some companies do this intentionally, so you save on taxes until the following year. It’s called deferred compensation. Reply