It’s a corporate rite of passage for employees to check their bank account after receiving a bonus and think there must be an accounting mistake. It’s disappointing to see an amount almost half of the one you were expecting.
Unfortunately, it’s most likely not a mistake, but simply how withholding tax rates for bonuses work. However, it all evens out when you file your tax return.
If you’ve found yourself questioning why bonuses are taxed so heavily, we’ll help fill you in.
How Are Bonuses Taxed on my Paycheck?
If you do a quick calculation on your bonus check, you may find the withholding tax rate for your bonus is higher than the one for your regular salary.
Your regular salary is subject to standard withholding rates, but your bonus is subject to supplemental withholding rates.
Okay, but what do supplemental withholding rates mean?
- Bonuses are considered supplemental wages, which are typically lump sum amounts you are paid outside of your base salary. This additional pay is withheld at flat rates, referred to as supplemental withholding rates.
- The current federal supplemental rate is 22% for pay under $1 million and 37% for pay above $1 million.
- Each state also has its own rates and rules concerning supplemental wages. For example, New York’s supplemental tax rate for bonuses is 11.70%, whereas Illinois’ is 4.95%.
- In addition to the federal and state supplemental withholding rates, bonuses are also subject to Social Security and Medicare withholding. In most cases, this is an additional 7.65%, but it can be more or less depending on your income level.
- There is a Social Security wage cap, so if you are over this amount by the time your bonus is paid, you won’t see the 6.2% withheld, but you may need to pay the additional Medicare surcharge of 0.9%, which kicks in at wages as low as $125,000 for married filing separate taxpayers.
How Are Bonuses Taxed When You File Your Tax Return?
Even though bonuses have a different tax withholding rate than your salary, they are taxed the same as your other ordinary income when you file your tax return. In other words, bonuses are not actually taxed at a higher rate than normal wages.
Bonuses are totaled with your other pay in box 1 of your Form W-2 and reported on the same line as your employment wages. When the tax software calculates the tax on your bonus, it is at the same tax rate as your salary, interest income, or short-term capital gains.
If your ordinary tax rate is less than your bonus withholding tax rate, you may receive a refund from the over-withholding when you file your tax return. Others may not be so lucky and still owe an additional amount to the IRS or their state(s).
Need Help Understanding Your Taxes?
If you were surprised when you saw how heavily your bonus was taxed on your paycheck, don’t worry—you’re not alone. Withholding tax rates for bonuses differ from the standard withholding rates you are accustomed to seeing on your paychecks, but the wages are still taxed the same on your tax return.
Want to avoid further tax surprises? Gordon Law makes tax filing a breeze, especially for those with complex tax situations. Led by a tax attorney and CPA, we’ve saved our clients millions! If you’re confused by self-employed taxes, international taxes, cryptocurrency taxes, or investor taxes and want to maximize your refund, reach out to our team at (847) 580-1279.
