How is your holiday bonus taxed
How is your holiday bonus taxed

Holiday Bonus Taxes

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December is a time for giving gifts, and some employers give year-end bonuses to their employees to show gratitude for a year of faithful service. If your employer has promised you a bonus, you’re likely already thinking of all the ways you could use that money.

However, before you get carried away, remember that holiday bonuses are considered compensation, just like paychecks, so there will be taxes withheld from your bonus. So, how much will your bonus be taxed? Let’s take a look.

Social security tax: You pay social security tax on all compensation up to $137,700 in 2020. If you haven’t yet exceeded that ceiling, then expect your employer to deduct 6.20% from your bonus for social security.

Medicare tax: You pay Medicare tax on all your compensation so another 1.45% will be deducted for Medicare tax.

Federal income tax: The IRS typically requires a flat percentage of your bonus to be withheld when you receive it as it’s considered a supplemental income. Under tax reform, the federal tax rate for withholding on a bonus was lowered to 22%, down from the federal income tax rate of 25%.

Your employer has the option to aggregate your bonus with your regular paycheck and withhold taxes on the whole amount, which may result in even higher withholding than 22%. But don’t worry, the money may not be lost. Since tax rates on supplemental income may be higher than your actual tax rate based on your total income when you file at tax time, you may get some of it back as part of your federal tax refund when you file your taxes.

State income tax: If your state imposes an income tax, and most states do, state income tax will be withheld at whatever rate required by state law.

Retirement plan contributions: If you have asked your employer to withhold a percentage of your wages as a contribution to your 401(k) or another contributory retirement plan, it is likely that the same percentage will be withheld from your bonus. So, if you have requested that 15% of your paycheck goes into retirement, then 15% of your bonus may go there as well. This will be good news when you retire with a bigger nest egg than you would have had otherwise, but it will pinch a bit in your wallet now.

Add these all together, and that’s how much may be withheld, but the good news is you are getting a bonus and may get some of it back when you file your taxes!

Don’t worry about knowing these tax rules. TurboTax asks you simple questions about you and gives you the tax deductions and credits you’re eligible for based on your answers. If you have questions, you can connect live via one-way video to a TurboTax Live tax expert with an average of 12 years experience to get your tax questions answered. TurboTax Live tax experts are available in English and Spanish year round and can also review, sign, and file your tax return or you can fully hand over your taxes from start to finish to a TurboTax Live Full Service tax expert all from the comfort of your home.

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