Imagine doing contract work for one of the most successful concert tours of the year, and the music icon hands you an envelope with $100,000! Now you’re probably accustomed to $5,000 to $10,000 bonuses for your contract jobs, but $100,000? First, how would that change your life and boost your finances? You may know right away how that large bonus will change your life and what you will do with it. Maybe you’ll purchase a home or save for your kids’ college. But do you know how this large bonus will impact your taxes or how you will be taxed as a contractor?
Don’t worry if you aren’t sure. TurboTax has you covered and is here to break down what you need to know about the tax implications and how to save on your taxes through this new windfall.
How is my bonus taxed as a contractor?
Unlike an employee who’s bonus would be taxed upfront at a flat 22% rate under the percentage method, as a contractor, the payor would not withhold taxes from your bonus upfront. Your bonus income of $600 or more would be reported on a Form 1099-NEC at tax-time and would be included with your other self-employed income. Because you are an independent contractor, your income would be reported on Schedule C and your tax rate would be based on the tax rate for your net income (10%, 12%, 22%, 24%, 32%, 35%, 37%), so you want to make sure you deduct all of your expenses directly related to your independent contract work like mileage, supplies, and equipment to reduce your net income. Because you are considered self-employed, you would also be subject to self-employment taxes at 15.3%, which is another reason you want to make sure you claim all of your business expenses to lower your self-employment taxes.
How can I avoid a tax hit when I receive a large bonus?
When employees receive a bonus, taxes are withheld when they receive it so they may not have to worry about a large tax bill at tax-time. If you are a contractor, however, you may need to follow these steps to avoid a tax hit:
- Pay estimated taxes to avoid a large tax bill at tax time.
- Claim all of the business expenses you are eligible for to lower your self-employed income and self-employment taxes.
- Don’t forget at tax-time you are able to claim the standard deduction which increases every year ($13,850 single, $27,700 married filing jointly for tax year 2023).
- If you purchased a home with your windfall you may be able to itemize your deductions if they are more than the standard deduction and you can deduct your mortgage interest and property taxes.
- If you are possibly getting a big bonus at the end of the year, see if the person paying you can defer it until the next year if a bonus is going to bump you up into another tax bracket and increase your tax rate.
Whether you receive a bonus as a contractor or an employee TurboTax has you covered and will help you maximize your refund or lower the taxes you owe. You can come to TurboTax and meet with a TurboTax Live Full Service tax expert, who can do your taxes in one video meeting while they do your taxes.