How are “Bonuses“ Being Taxed?
Updated: Aug 3, 2020
Bonuses are considered excellent way to motivate employees and reward top performers; however, they can also quickly change one’s tax return and the amount of taxes initially withheld depending on the payout. IRS regards bonuses as supplemental wages, which are not regular wages. For more details, see Publication 15 (2017), (Circular E), Employer’s Tax Guide for the tax year in question.
There are two ways of withholding taxes from bonus:
The aggregate method: is used when employer pays employee’s bonus with 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. Taxes are withheld at what is almost certainly a higher rate on the combined amount of your normal pay and the bonus. In addition to being more time-consuming and laborious for employers, using this method can take a bigger tax bite out of bonus payments.
The percentage method: Withhold taxes at a flat 25% - regardless of your actual tax bracket. If you receive a $1,000 bonus, under this rule, $250 (25% of $1000) goes straight to the IRS. Employers frequently choose this method because it’s easier to tax the entire bonus at a uniform rate.
Regardless of the method used to withhold income tax on supplemental wages, they’re subject to social security, Medicare, and FUTA taxes.
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