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Bonus Tax Rate: How Bonuses are Taxed by the IRS

Sep 25, 2019 3 min read Kevin Johnston

Key Takeaways

  • The amount you get taxed on your bonus varies by the calculation method your employer uses.
  • If your bonus is included with your regular paycheck, you may receive less of it.
  • As odd as it sounds, you may even want to refuse a bonus, or postpone it.

 

Congratulations — your boss says you will get a hefty bonus.  It's a big one (say $10,000) so you can now finally add that room to your house (if you can believe your contractor).  But wait… you won’t actually receive the full amount… thanks to the IRS.

 

 

Let’s look at the ways the IRS figures tax withholding on bonuses.
 

What is the bonus tax rate?

The IRS has a category called "supplemental wages" that includes severance pay, back wages, vacation payments, moving costs, overtime, taxable benefits, commissions and bonuses.

The reason for categorizing income is so it can be treated differently for income tax withholding purposes. The IRS and your employer treat bonuses in three different ways.
 

The Percentage Method

The IRS says all supplemental wages should have federal income tax withheld at a rate of 22%. So for a $10,000 bonus, you would have $2,200 withheld in federal income taxes and receive $7,800.

Your employer most likely will withhold this percentage from your bonus, because this is the simplest method. Fortunately, it is also the most beneficial to you.
 

The Aggregate Method

When your bonus is included in your regular paycheck, things get complicated. First, the normal withholding amount for regular income is calculated on the entire paycheck. Then the employer figures what was withheld from your last paycheck and subtracts that from your current withholding. The rest is withheld from your bonus.

This results in a higher rate of withholding on your bonus, and you may receive less of it simply because of the method used to calculate withholding.
 

How Bonuses Over $1 Million are Taxed Differently

Your bonus amount below $1 million must have 22% withheld, as mentioned. The amount above $1 million, however, is currently subject to withholding at 37%.
 

Strategies you can use to retain more of your bonus

Your best strategy is to ask for the bonus in a separate check from your salary. Then ask your employer to use the IRS supplemental wages rate of 22%. The employer will be in compliance, and you will get more money.

You could also request that the bonus be given to you after the end of the year. This can be advantageous if you think you will make less money next year, and your tax rate could be lower. If the aggregate method is used on your bonus, you will still have less taxes withheld if you are in a lower tax bracket.

 

What you can do next

Ask your employer or HR department which method is used for withholding on bonuses. Request the percentage method, if possible.

Calculate your tax bracket with the bonus included. If the bonus moves you into a higher bracket, figure out how much more tax you will have withheld on your regular income because of this. Then request that your bonus be split into two portions. Get half before the end of the year and half after the end of the year. This can keep you out of the higher withholding bracket.

Whichever method your employer uses to calculate withholding, the final income tax will be based on your total taxable income for the year when you file your income tax return. With that return, you receive credit for all the income taxes that have been withheld from your pay, including your bonus.

Prudential Financial, its affiliates, and its financial professionals do not render tax or legal advice. Please consult your tax and legal advisors for advice concerning your circumstances

 

Kevin Johnston writes about personal finance and investments, as well as financial management and planning. He has written for The New York Daily News, The New York Post, The San Francisco Chronicle and The Houston Chronicle.

 

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