Will a Bonus Make You Pay Higher Federal Taxes?
How do bonuses affect your taxes? This might make you think differently about that extra income. Here’s how it works.
With the holidays approaching, many companies are preparing their bonus checks. However, some employees who are looking forward to their bonuses are also concerned about tax consequences.
I gave up this “extra” part of my corporate pay, in exchange for the benefit of working for myself, when I left my day job a few years ago. An annual bonus was certainly an appreciated part of my income, however. However, if this year’s holiday season is anything like years past, I know I can expect people around me to complain that they’d rather not receive a bonus. But why?
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. They believe that they could potentially 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. Typically, they’ll see a net payment amount representing only a fraction of the gross income listed on their pay stub. This only fuels the anti-bonus fire.
What a Bonus Actually Does to Taxes
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. The same tax rates apply to each dollar shown, whether it came from your 9-to-5, your side hustle, weekend babysitting, or a holiday bonus.
There is a catch, though, and is the reason this confusion runs rampant. While the IRS doesn’t discriminate between regular pay and bonus pay, employers often do.
How Employers Calculate Taxes
Employers can choose between two primary methods of withholding federal taxes from bonus or supplemental income. This applies when said “extra” income 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 25% of the first $1 million in addition to 35% from the amount over $1 million.
Option 2: The employer may add the bonus payment to the most recent regular income payment. They would then determine the standard withholding based on tax tables and the sum of the two payments. Then, subtract the amount already withheld from the most recent regular income payment, and withhold the rest from the bonus.
*Option 3: The employer may base withholding on the sum of the bonus and regular pay using the standard withholding tables. *This 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.
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.
Outliers
One interesting exception to the rule of bonuses being 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%. This rate is usually significantly lower than their marginal tax rates.
My Final Advice
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.
Article comments
I currently earn $125k annually but just received a $500k bonus from my employer that just sold the company. Very generous, I know but now I am worried about taxes. Thinking that the flat tax of 22% wasn’t enough I had them withhold $150k for FIT. I file married and zero. What kind of a tax do you think I will have to pay in 2019?
But my question is why is supplemental income taxed at a different rate than the rest of your income? Why not based on your W4?
Is it legal for them to add all hours plus bonus pay on a final check and then tax it at the 40%. I had requested a 2 checks. One for regular hours check and then an additional check for the bonus for pay and they denied my request. If I request this, don’t they have to seperate regular hours from the bonus pay?
I get an annual bonus of 30k a year. They take out like 45% for taxes ..can I tell hr to NOT withhold any tax this year? I will have to pay is later bc no tax is taken now, but I rather have money in my account now and put some aside for payment later..is this possible??
i work in collections and our bonus arent taxed state or fed but ssi and medicare is taking out iam i going to be stuck with a huge bill at the end of the year claiming single-zero ive had a bonus thus far of 7000 with 16k income and 1828 fed taken out
thanks
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
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.
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?
If I received $24K as incentive bonus to my regular pay adding to normal pay and become $29K, what is the tax rate?
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
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
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
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.
Can an employer withhold the 25% from your paycheck before giving you your bonus?
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
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.
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,
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
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.
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.
If we are contributing to a 401k, is the bonus taxed on the amount after the 401k deduction is taken?
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?
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.
change your status to marries 5
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
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.
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.
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 🙂
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.
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
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!
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.
Good post. This is a point of confusion for many people.
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.
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.
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. .
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.
While I have understood this, it seems alot of people did not. Great simple explanation, Flexo!
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.
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.
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….
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.
They need to set the bonus as an annual or u will be taxed to much
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.
My Bosses 1099 my bonus so there are no withholdings taken! I then owe ALL the taxes on it..
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.
Tell your colleagues I’ll take their bonuses…
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!
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.
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.
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
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.
Ah gotcha, I always get the term confused. Do you have the opportunity to jump to the profit center side? Would you like to?
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
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.
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.
Ahh. Thanks. This comment made more sense than the article itself.