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Federal Taxes on Bonus Pay

This article was written by in Taxes. 49 comments.


With the holidays approaching, many companies are preparing their bonus checks, and employees who are looking forward to their bonuses are concerned about tax consequences.

I gave up this “extra” part of my corporate pay for the benefit of working for myself when I left my day job last year. If this year were anything like what I’ve experienced in the past, people I know would complain that they’d rather not receive a bonus. There is a widely-held belief that the extra income from a bonus, which is not really extra, just a variable aspect of compensation, supposedly bumps them into a higher tax bracket. This, they believe, is bad, because it would mean that they owe the government a higher tax rate on all of their income. This is incorrect and represents confusion about how marginal tax rates work.

These misconceptions and the resulting complaints are intensified when the bonus check arrives with a net payment amount representing only a fraction of the gross income listed on the pay stub.

For most taxpayers, the IRS treats bonus income the same as regular income. All taxable W-2 income gets added together in one box when you file your federal tax return forms, and the same tax rates apply. There is a catch, and this is why confusion is rampant: While the IRS doesn’t discriminate between regular pay and bonus pay, employers often do.

Employers can choose between two methods of withholding federal taxes from bonus or supplemental income when it is given to the employee in a check or direct deposit separate from regular income.

Option 1. The employer may withhold a flat 25% for federal income taxes from the bonus payment. If the employee receives over $1 million in bonus payments in one year, the employer can withhold 35% from the amount over $1 million in addition to 25% of the first $1 million.

Option 2. The employer may add the bonus payment to the most recent regular income payment, determine the standard withholding based on tax tables and the sum of the two payments, subtract the amount already withheld from the most recent regular income payment, and withhold the rest from the bonus.

The third option is for employers who choose to combine bonus compensation with regular compensation in one payment, check or direct deposit, without any differentiation between the two types of income.

Option 3. The employer may base withholding on the sum of the bonus and regular pay using the standard withholding tables.

Regardless of the method the employer chooses, bonus income and regular income are grouped together when you file your taxes. The IRS will refund any overpayment and will collect any underpayment.

One interesting exception to the idea that bonuses are taxed the same as all other income applies to hedge fund and other investment managers. This type of income is known as carried interest. Investment managers often take their bonuses from investment gains, and these can be taxed at the long-term capital gains rate of 15%, a rate usually significantly lower than their marginal tax rates.

Don’t be afraid of earning that bonus or more money in general. Your employer might withhold more of the check for taxes than you’re used to, but it will even out when you file your taxes.

Updated February 28, 2013 and originally published February 18, 2011. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes, also known as Flexo, is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow Luke Landes on Twitter. View all articles by .

{ 49 comments… read them below or add one }

avatar Financial Samurai

Good to hear you have rich colleagues!

The IRS simply treats them as they earn that bonus annualized i.e if you get a $50,000 bonus…. the IRS treats it as if you make 50K X12 = $600,000.

Definitely do the minimum withdrawal of 25% under a million payment for sure!

Are you finally non-exempt at your employer Flexo? As that’s stage one to get those big bonuses!

Best,

Sam

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avatar Luke Landes ♦127,371 (Platinum)

I think you mean Exempt. I’ve been Exempt for a while. But no, I work in a corporate division, an expense center, not a profit center, so our bonuses are nothing to write home about. But I don’t complain, it’s better than nothing.

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avatar Financial Samurai

Ah gotcha, I always get the term confused. Do you have the opportunity to jump to the profit center side? Would you like to?

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avatar Raymond

I have a questions what would the tax percentage be for a 5K bonus. I recieved a 5K bonus and after taxes i was only left with $2604 this seem that i was taxed way to much.

thanks

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avatar Luke Landes ♦127,371 (Platinum)

The tax is the same as any other income you receive, but your withholding might be higher. See the article at the top of the page for the explanation.

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avatar Apex ♦477 (Nickel)

Ray,

Your with-holding on that money probably goes something like this:

25% for federal taxes.
7.65% for FICA (Social Security and Medicare)
6.25% for state (in MN that’s what it is on bonus pay, it will change state by state)
5-15% for 401-k depending on how much you are contributing to yours.

Add those up and you get and average of 49% taken out of the check. Which is right in line with your number.

See what people don’t realize is the with-holding is assuming that all the normal deductions and lower tax bracket income that would normally come in to play are all being accounted for in your normal salary check. In fact this assumption is probably not that far off unless you are making a very low salary. Probably this income will all fall in the 25% tax bracket for federal as well as a moderate tax bracket for state.

In your normal check the first 15-40K of your check will have zero tax when you account for allowance (wife + 2 kids is 14,000 in deductions), standard deduction is 11K, if you itemize then instead of getting the standard deduction you probably end up with 20K of deductions or something. Obviously if you are single most of those numbers get cut in half or more, but you still have a good chunk of money that is taxed at zero. Then you get 8-16K at 10% depending if you are single or married. Then the next 25-50K is at 15% depending if you are single or married. After that its at 25%. So on a check of 5K normal salary, probably 1/3 or more is taxed at 0, 1/10 is probably at 10%, 1/2 is at 15% and very little at 25%. So your tax rate on the entire 5K looks like its something like 8% for federal. But that extra 5K, that’s all going in your highest tax bracket, so it probably is getting taxed at 25%. Now if you are not in the 25% bracket yet then you will get the extra 10% back at the end of the year when you figure your taxes. If you are up in the 28 or 31 or 35% brackets then you are actually going to owe even more money at the end of the year because the 25% withholding was not enough.

It’s all going to come out correct in the end as Flexo says but that extra money you got that paycheck is going to be taxed much higher than the average of the rest of your money. You can see that even for moderate income that extra money gets taxed pretty high.

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avatar Wojo

When I was in high school, I heard friends talk about raises at work the same way. They weren’t interested in them, or in overtime work, because they would have more taxes taken out of their paycheck. Their ignorance of the tax laws is a shame because they’re artificially holding themselves down. Shame on whoever taught them that, too.

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avatar H Lee D

Tell your colleagues I’ll take their bonuses…

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avatar Jenna

Haha! I second that. As someone who hasn’t worked for commission or bonuses this isn’t something I know much about. Thanks for the info Flexo!

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avatar skylog ♦368 (Nickel)

i also agree! i do not have the option to get a true “bonus,” and i would love to have those “unwanted” bonuses. regardless, it was interesting to learn how they are taxed.

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avatar Evan

My Bosses 1099 my bonus so there are no withholdings taken! I then owe ALL the taxes on it..

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avatar David

If you are an employee – I think your employer is breaking the law. However, the only additional tax you would owe is Social Security tax. When income tax is witheld or paid at the end of the year, the amount you pay is the same.

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avatar Jeff

Anyone can help me to see if I am overtaxed on my bonus? I got $48K annual bonus this week, but I only have about $28K deposited into my checking account. My HR people confirmed that it is because of high tax bracket…. Does this sound right? I am paying 40% of bonus as taxes, including federal, social….

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avatar David M

Sounds about right to me.

However, if you were overtaxed, you will get it back and undertaxed you will pay more later.
Bonuses are just like all other income, you add them all together, tax all deductions, calculate you taxes and if you overpaid you get a refund and have underpaid you have to pay extra.

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avatar Apex ♦477 (Nickel)

Jeff,

see my comment to Raymond above. If anything, I think they didn’t take enough taxes out. Unless your base salary is very low you are likely to be in a high tax bracket with that kind of bonus. 40% sounds like the minimum they should be taking.

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avatar Lynn Mosher

Help…….My emploer is withholding 18% of my bonus off the top then showing my gross bonus earned on my paystub as the total amount less the 18%. The 18% deducted does not show anywhere. Example, total bonus earned is $1,200. paystub shows total bonus earned is $984. In addition, sometimes there are Federal Taxes withheld at a fraction of a percentage ($1,200 bonus, $8.00 Federal taxes) and other times there are no Federal Taxes withheld. Where is my 18%? State of residence is Florida.

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avatar David M

You will need to ask your employer.

However, seems to me that your bonus is not $1,200 but is $984 as $984 is what is showing up on your pay stub.

As I stated before – the IRS play by the “You can pay me now or you can pay me later rules” – your bonus just gets added with normal income to determine how much you owe the IRS. If you did not have a bonus and the when you filed your taxes you ended up at zero – then only paying $8 in taxes on $984 would cause you to owe taxes. Assuming you are in the 25% tax bracket the tax on $984 would be $246 – since you only paid $8 you would owe $238 when you filed your taxes.

No assuming you are like most Americans and get a large tax return each year – then your undertaxed bonus would only decrease your tax return amount by $238.

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avatar gotr31 ♦224 (Cent)

While I have understood this, it seems alot of people did not. Great simple explanation, Flexo!

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avatar krantcents

Personally, I like bonuses because I can do something with a lump sum versus an extra $50 per week. This month, I am receiving a lump sum from a grant which will be taxed at annualized rate similar to a bonus. I plan on adjusting my withholding to avoid too much tax being withheld. If you receive a bonus, this is one solution. .

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avatar Luke Landes ♦127,371 (Platinum)

The lump sum approach definitely has benefits for many people. It’s mostly a preference, but I would say that those who need cash flow help throughout the year might be better off with payments in every paycheck, but only if the additional amount is large enough to make a difference in the cash flow.

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avatar slug

Was informed through the grapevine that 2010 bonuses will be paid in July 2011 at my company. Really? When you reinforce me for behavior I did a year and a half ago, it is not really a true incentive to repeat the behavior. Ridiculous. It’s bad enough when they paid in March. Wish I could start charging them interest!

Note I am thankful to have a job, and getting a bonus is nice, even if it is incredibly delayed.

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avatar Luke Landes ♦127,371 (Platinum)

I’ve found the same thing — the larger the company, the later the delay, and the loss of the action-reward or cause-effect relationship. Behavioral psychology 101. In most cases, a bonus really isn’t a reward, anyway, it’s just a piece of compensation that people come to accept and believe they deserve.

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avatar freeby50 ♦120 (Cent)

Good post. This is a point of confusion for many people.

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avatar Cejay ♦1,521 (Half-Dollar)

We get bonuses at year end and the scenario that you described has ALWAYS occurred. Even my manager has told everyone that the bonuses are taxed at a higher rate.

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avatar tigernicole86 ♦55 (Newbie)

During my first year at my last job, we received a bonus and people were complaining about it getting taxed so much. I was just excited to get an extra $500 dollars(after taxes) just for doing my job. And then they decided to do away with bonuses and give only an 11-cent raise for “merit-increases”. Now I’m a at job where I make a lot more every month and there’s the potential for a really nice bonus at the end of the year! But I have to agree, that a bonus is just nice little extra bit of compensation and even though it is taxed a little bit higher, it’s still extra!

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avatar andy

we had a 7th or 8th grade social studies / U.S. teacher that was teaching us that if you were on the edge of a tax bracket, you wouldnt want to get a small raise, and gave us examples like if you grossed 5k you would be taxed 5% so you would net 4750, but if you grossed 6k, you would be taxed 25% and net 4500. i was talking to my dad about it and he was like no, that’s not the case at all. the tax brackets dont jump enough to where you would make less money.

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avatar david M

The tax brackets do not jump at all!

If you made 5K and the first 5K was taxed at 5% you would net $4,750 – like you said.

Now let imagine that 5K is the point when the tax rate changes and taxes over 5K are taxed at 25%. Your taxes and net and taxes 6K would be as follows:

Taxes Net
5K $250 $4,750
1K $250 $750
Total $500 $5,500

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avatar MC

So help me understand this; as with bonus pay, more is better, despite the fact you could be paying a slightly higher tax rate for the entire year. You still want the bonus!

So, this is where I don’t understand the arguments about not raising taxes against top earners. “We need them, so we can’t tax them.” Not so; we need them to want to earn more; which is inherently what takes place either way. I’m not hating against high earners; I’m just don’t think it’s a level playing field.

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avatar bcp

it’s NOT.

the poor wealthy folk need all the incentive we can give them, so that they might be good americans and create jobs for the rest of us losers…if we don’t they may even go overseas or leave our country or something!

and many wealthy folk will soon understand why they need a healthy middle class :)

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avatar Joe

Is earning extra money at the same job the same as a bonus? As far as taxes go? I am a teacher at a private elementary school. I am a salaried employee. I received (2) payroll checks every month, 12 months a year. During the summer, I teach summer school, and my summer school pay is added to my regular payroll checks. In July I make an additional $3000, added to my regular checks, but my taxes jump through the roof. My employer says: You’ll get it back at tax time. Okay, but what if I need the money now? Is there anything else that can be done?

Joe

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avatar David M

From no matter what company and bonus or regular earning, you pay the same amount of taxes to the IRS. That is, if you earn $50,000 in income from one empolyer, $20,000 from one employer and $30,000 from a second employer or $40,000 in income and a $10,000 bonus – you federal taxes on all 3 – will be exactly the same.

Is there anything you can do – yes contact your payroll department and have them tax less taxes out of your paycheck.

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avatar christy

i pay in about20 to 22% out of most of my checks. At the end of the year I dont receive much of it back. Any suggestions?

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avatar Andy Dale

Christy,

You might try the “marginal tax rates” link near the top of the article. As long as you’re doing your taxes right, the amount you make and the amount taken in taxes should be correct. How much you make determines what percent of taxes are taken, and the tax tables should show you this.

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avatar Julie

If we are contributing to a 401k, is the bonus taxed on the amount after the 401k deduction is taken?

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avatar Philip Di Russo

i am what is known as a notch person i would make enough money that my social security would be paid in full within 60 -75 days in the time i would be working although i get 1467 and a nmu union retirement i am way below the standard to pay any income taxes Y don’t the gov. smarten up and get rid of the WW2 tax ? there would be less cheating and phoney deductions be played in this form of tax crap.

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avatar JoeBloe

I have a one rule about taxes – NEVER, EVER get a refund.

The way I abide my own rule requires a little bit of work and expense (for hiring the expertise) but, always nets me more money than if I had gone the regular route.

1) Take EVERY DEDUCTION available,
2) Determine what I will owe at the beginning of the taxable year (conservatively overestimate any uncertainty),
3) INVEST what I have determined I will owe as aggressively as is prudent – and do it upon receipt of EVERY PAYCHECK (no exceptions),
4) PAY my taxes at MIDNIGHT April 15th (I may actually do them in January but the Government isn’t getting my check until the last possible second.

The other thing I’ve done is payed my monthly mortgage in 2 payments each month. It cost a few dollars more per month to do this but it is about $50/month on a $200k mortgage. I paid off my 1st mortgage (30yr fixed) in 19yrs doing this and saved myself a ton of money (tens of thousands) on interest in the process.

I don’t earn a ton of money – I made $60k/yr (living in the New York Metro area ) for the 1st time at the age of 40. But at the age of 49 now I could retire and never worry about a thing – because of what I did from the time I was 16. I didn’t do anything fancy and I didn’t live on a shoestring. I just lived a little below my means and was disciplined about setting goals, doing what I said above and investing every extra penny every time a got paid. Money doubles every 7 years on average – regardless of the economy in the short term.

It isn’t magic and it isn’t hard – and you don’t even have to be smart or be financially sophisticated. All it takes is the discipline to keep putting the money away every week (50 cents or 50 dollars) without fail. AND, treat the IRS like your mortal enemy. Never give them an inch, never give them anything early and never stop asking the people writing your checks how to maximize what you keep.

I don’t care what your politics are – we can all agree that those people in government waste more money getting out of bed then some county’s total GDP for a year. Keep your money as long as you can, make it work for you and guard it like you are the only thing standing between a wounded child and a pack of ravenous wolves.

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avatar Matt

Can I avoid paying more taxes on a bonus by increasing my dependents for the bonus? If the answer is yes, do you know of a good website that calculates what it would be if I had X dependents? Thanks for any help on this.

Matt

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avatar rasuajak

Hello, I need some help, say I am earning 100K (married with two kids) & wanted to reduce deductions from 4 to 0, how much less I will see in my pay stub?

Thanks,

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avatar Paul Caesar

When an employer gives a bonus can the employer’s portion of FICA be deducted before the check is calculated? For example if an employer announces a $1000 bonus gross amount, deducts $62 for Social Security and $1.45 for Medicare and then issues a check with the with the gross amount of $936.55 with the employee’s portion of FICA deducted along with the standard 25% federal withholding.

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avatar unique

i got bonus $3200 but the gov took 40% and i just receive $1700. why 40% considering it’s my money, my hard work and i’m not rich as well. unfricking believeable

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avatar JB

Can an employer withhold the 25% from your paycheck before giving you your bonus?

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avatar A

This doesn’t seem to be true. With my regular pay, I receive 67% of my gross income. With bonuses, I receive 60% or less.

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avatar ST

I had extra vacation total 51 hrs at the end of the year which the employer informed me they would buy back. The buy back came in the form of a Bonus Check, which they only paid me for 43 hrs of the 51 they said I had in the letter. Is this legal ???? They also withheld over half of the check in taxes. Uhhhhhh not sure what they are doing. Do You ????
Happy Holiday,
ST

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avatar Carla Ford

How does an employeer benefit by using the 25% tax across the board? The company I work for is INSISTING on taxing our bonuses 25%. In the past they did not, we were given the option to “opt out” of being taxed on our bonus…

Very confused,
CFord

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avatar garmar

Please help me figure out how to claim my bonus income. i work for company A. it is owned by company B. company B paid me a discretionary bonus and supplied a 1099 misc with box 7 (non employe comp) marked. i dont think i am self employed to company B. i think it should be claimed as other income. the explinations on form 8919 dont match a claim that it should have been on a w2 and again i dont see self employment fits. whats the best way to do this.
thanks

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avatar Frank

If I received $24K as incentive bonus to my regular pay adding to normal pay and become $29K, what is the tax rate?

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avatar Marla

My husband gets paid every week but not regular pay as a bonus? is that right? Our taxes are very high. Every year we are borrowing to pay taxes. We have no dependents and we don’t even clame our selves. What do you recamend?

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avatar concerened in ohio

Where I work at was just bought out. They are going to payout our severance pay “transition” pay benefits as a “bonus”. ‘they will be taxed at the IRS Bonus Rate” Many of us are unclear how this this possible and how this will effect our tax brackets on the sum of money.

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avatar Ian

Question that you might be able to answer… My wife usually gets a small bonus from her work around the holidays. Her pay stub (and her coworkers’ pay stubs) for the end of the year (2013) showed that her boss gave her the bonus, but she never got it. she talked to her boss about it and she said she was gonna give it to her. its now Jan 30, 2014 and she still has yet to see the bonus $$ that was promised and already processed on her pay stub and taxes. How illegal is this? Could her employer be doing this so she(the employer) can have more of a last minute tax write off for the business? we feel stuck and we know itll cost legal fees to take action against her

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