4 Key Facts: How Your Yearly Bonus Will Be Taxed

Several large corporations have announced they’re giving their employees bonuses in response to the passing of tax reform, including American Airlines, Bank of America, and Walmart. Maybe you’re one of the lucky ones. Or perhaps you received a yearly bonus from your boss as a reward for hitting your quotas. Either way, Uncle Sam will be taking a piece of the pie in a specific way, as the IRS sees bonuses as ‘supplemental wages.’ Read below to understand how your bonus will be taxed, whether you received it in 2017 or 2018.

Your bonus will be taxed at a higher rate than your regular paycheck

There are two ways your employer will calculate bonus withholdings: either based on pay, the time period, and your W-4, or a flat 25 percent. Employers often employ the more uniform and less time consuming route of taxing at 25 percent. This often works out to the employers’ advantage as well. You have no control over these factors besides your W-4.

Your yearly bonus can bump you into a higher tax bracket

An unfortunate truth is that your bonus could cause you to be pushed into a higher tax bracket. However, you won’t be taxed entirely at a higher rate than if you had not received the bonus. Rather, it increases the amount of you pay on taxable income that exceeds a certain amount.

Larger bonuses are taxed separately and at a higher rate

If your bonus exceeds $1 million, your employer must withhold 39.6% of the amount above $1 million. That total is in addition to the 25% below $1 million, resulting in a large amount of the total being sent to the IRS.

You can prevent overwithholding from next year’s yearly bonus

To have less tax withheld from your bonus check, claim additional withholding allowances on your W-4 for next year. You can do this by requesting a new form from HR or by downloading one from the IRS website. You can claim as many allowances as you need, regardless of the number of dependents you have.

Although you won’t take the whole check home, you’ll be happy to hear your bonus won’t be taxed as much. Keep in mind that the IRS considers bonuses taxable whether they are cash or non cash, received at the holidays or another time of year, although a small non-cash gift does not count, as it is a ‘de minimus fringe benefit.’

Leave Comments

Free eBook

Tax Settlement Options

Download Now
Having a tax debt is stressful. We can help.