STPS

How Does Tax on Bonuses Work?

Many people are perplexed by tax on bonuses. If your employer gives you a bonus, you may be wondering how much of it you get to keep after taxes. It’s critical to understand how bonuses are taxed so you can properly plan for your financial future.

What are Bonuses?

Bonuses are categorized by the IRS as supplemental income, leading to a distinct tax treatment compared to regular wages. Typically, bonuses incur higher tax rates compared to regular income due to the utilization of “supplemental withholding” by the IRS to calculate taxes on bonuses. This method acknowledges that bonuses are often paid in a single sum and not subject to standard payroll withholding.

How Does it Work?

The first step is to determine how much federal income tax must be withheld from the bonus. You can do this by using the IRS’s Supplemental Income Tax Withholding Rate Table. This will give you an idea of the exact numbers you need to hit.

Supplemental withholding is intended to ensure that the appropriate amount of taxes are withheld from your bonus. Your employer determines the amount of supplemental withholding based on the amount of your bonus and your tax bracket. Your employer will withhold federal taxes at a flat rate of 22% on bonuses up to $1 million, and 37% on bonuses over $1 million. If you receive a $10,000 bonus, your employer will withhold $2,200 for federal taxes.

Employer Responsibilities:

As the employer, you must ensure that the appropriate amount of taxes are withheld from bonuses. This includes staying current on tax laws and ensuring that your payroll system is up to date. Failure to do so may result in hefty IRS fines.

What if Your Employee Doesn’t Want to Have Taxes Withheld on Their Bonus:

If an employee does not want taxes withheld from their bonus, they must complete a new W-4 form. This will allow them to indicate that they do not want any additional income taxed. However, it is important to note that this may result in them owing money at tax time. 

Another option is to pay less in taxes on your bonus. One option is to request that your bonus payments be distributed throughout the year. This reduces supplemental withholding and may result in a lower overall tax liability. Another option is to contribute to a tax-deferred retirement account, such as a 401(k) or IRA. Contributions to these accounts are not federally taxed, which can help you reduce your taxable income and overall tax liability.

Ways to Make the Process Easier:

One of the best ways to deal with this obligation is to outsource to a professional payroll service. Many people overlook the importance of researching a professional’s past reputation when looking for someone to work with. Checking what previous customers have said will give you an idea of what to expect. Take note of any patterns in the reviews, whether positive or negative. Furthermore, you should only work with someone who has extensive industry experience. Working with someone who isn’t well-known in their field is a risky move.

Bottom Line:

Although understanding how to manage tax on bonuses may appear difficult at first, it is not as difficult as most people believe. Keep this information in mind so that you can make the best decision for you and your company. Do you want to know more about what we can do? Contact us now to see how we can help you.

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Written by Melisa Bush

Before coming to Superior Trucking Payroll Service, in 2011, Melisa worked for a trucking company with 50 trucks. She was the one who processed the driver’s miles and expenses.

Because of this experience, she understands the challenges our clients go through each week while preparing their payroll data for us. Customer service is #1 for Melisa. Her goal is to treat our clients like people with true and real needs, not just another number.

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