Why bonus checks are taxed higher

When you receive a bonus, the payroll system thinks you are going to be in a higher tax bracket overall and withholds as if that is your new pay on a regular basis.

When you file your tax return, your tax rate may rise a bit to 16 or 17 percent, but not the full 25 percent that you were taxed during the one paycheck with a bonus added to it. So, the extra amount that was withheld back in July gets refunded to you when you file your return.

Is there any way around it? If you are married with two children, you would normally claim Married and 2, but if you want a lower amount of taxes withheld you could claim Married and 8, instead. So, if you know you have a bonus coming up, you could increase your allowances on your Form W-4 and have a lower tax rate applied to your bonus check. Now more than ever, your financial support is critical to help us keep our communities informed about the evolving coronavirus pandemic and the impact it is having on our residents and businesses.

There are limits on how much you can contribute to your HSA. You may be able to save on taxes by asking your employer to delay paying the bonus until January. If the bonus would push your income into a higher tax bracket this year and you expect less income next year, this strategy makes considerable sense. Even if you will still be in the same tax bracket, you benefit by delaying the day you have to pay the taxes by a year. If you itemize your deductions rather than taking the standard deduction, you can make a contribution to a charity to reduce your taxable income.

You may be able to reduce taxes on your bonus to zero by asking your employer to make it a non-financial bonus. Examples of non-financial bonuses could include the ability to work from home or work flexible hours. Not all non-financial bonuses are tax-free, however. If you get extra paid vacation time in lieu of a check, for instance, it can be taxed as a financial bonus. If your employer delivers the bonus to you as part of your regular paycheck, it will be taxed like regular income.

Maybe you got one for the holidays or are expecting one in the first quarter of the new year. Your bonus check may be a reward for your hard work throughout the year, but Uncle Sam still wants his share. Even if you and your employer view your bonus as outside of your regular compensation, the IRS classifies bonuses as supplemental wages. Unless the law specifically says otherwise, income is taxable. Did your employer give you a tidy cash sum for outstanding work? Send you on an all-expenses-paid vacation for meeting a business goal?

But there is a noteworthy exception: employee achievement awards. If your employer presents you with an achievement award, you may not have to pay federal tax on it provided …. For , the Social Security tax rate is The Medicare tax rate is 2. Federal income tax withholdings for supplemental wages depend on whether your employer pays your bonus separately from your regular wages, and whether it has withheld taxes from your paycheck throughout the year.

This means the tax rate you pay on your regular salary will get applied to your bonus. But if your employer pays your bonus separately from your regular paycheck or specifies the difference between wages and bonus money in a regular paycheck, the rules differ.

The calculation method your employer chooses, along with your tax bracket, determines whether your bonus gets taxed at a higher rate or at a rate lower than the one on your regular salary. As we previously mentioned, your bonus will be subject to federal payroll taxes, typically including income, Social Security, Medicare and unemployment taxes.