Are you in line for a bonus at work? Lucky you! But don’t count on the entire bonus amount appearing in your paycheck. We all know that federal taxes will be taken out for part of your bonus, and your state may want some as well.
The same is true of other supplemental wages you receive, including overtime, vacation pay, back pay, commissions and even taxable fringe benefits. All are considered wage income and are subject to federal income tax withholding and other payroll tax withholdings (such as for social security taxes).
If your employer combines the supplemental wages with your regular wages, your employer may withhold federal income tax as though the combined total were your regular pay for the period. But if your employer pays you separately for the supplemental wages or separately states them on your pay stub, your employer may withhold income taxes on the supplemental wages at a flat 25% tax rate, no matter how many allowances you have claimed on the W-4 form you filed with your employer.
Whichever method your employer uses, when you file your tax return, the supplemental wages will be combined with your regular wages. Depending on your deductions, exemptions and tax bracket, you may get some of the withholding back when you file your taxes. Although you may be taxed more heavily when your supplemental income is initially paid out, you may see a tax refund at tax time, which is good news.
Ready for more good news? There are few payments that aren’t subject to income tax and payroll tax withholding. Here are two of the most common:
Moving expense reimbursements. If your employer reimburses you for moving expenses to a new job location that is at least 50 miles farther from your old home than your old job was, then those moving expenses won’t be taxable to you or subject to income tax and payroll tax withholding. Those moving expenses might include the cost of moving your household goods and traveling and lodging. But if your employer pays you for meals or pays you a per diem for your time, then those payments would be considered supplemental wages and would be subject to income tax and payroll tax withholding.
Fringe benefits. If your employer reimburses you for using your car for business purposes, provides a gym on the premises, or takes you and other employees on a golf outing, those “fringe benefits” are not supplemental wages and not subject to withholding. But not all fringe benefits are non-taxable: if your employer provides you with a vehicle for your unlimited use, or pays for your membership at a health club or country club, you can expect to see the value of those fringe benefits included on your wage statement and withholding tax taken out of your paycheck.
Don’t worry about knowing these tax laws. TurboTax will ask you simple questions and give you the tax deductions and credits you deserve based on your answers.