This means that somewhere around 40 % of this ” bonus ” is deducted, which is double the top tax bracket I fall into.
All supplemental wages are taxed the same way as regular pay . That is, bonuses and other supplemental wages are subject to federal income tax , Social Security tax , Medicare taxes and any applicable state or local income taxes .
When you pay your employee a bonus , this is treated by the ATO as paying wages. Because of this, bonus payments are liable for payroll tax . For example, in NSW the payroll tax rate is 5.45% for businesses exceeding the payroll tax threshold of $1,000,000 annually.
It comes down to what’s called “supplemental income.” Although all of your earned dollars are equal at tax time, when bonuses are issued, they’re considered supplemental income by the IRS and held to a higher withholding rate . It’s probably that withholding you’re noticing on a shrunken bonus check.
The usual way to calculate withholding on a bonus (or other wages that are not part of a regular paycheck — called “supplemental wages”) is to withhold a flat 25 %, with no allowance for exemptions, or 39.6% if it’s over $1 million.
Bonus Tax Strategies Make a Retirement Contribution. Contribute to a Health Savings Account. Defer Compensation. Donate to Charity. Pay Medical Expenses. Request a Non-Financial Bonus . Supplemental Pay vs.
If your employer withheld more than is necessary, you will get a tax refund . If not, you may owe money. The bonus makes it more likely that you will get a refund , as the withholding tables don’t handle variable pay well. Withholding will have no effect on how much tax is owed on your income.
The IRS considers cash bonuses “supplemental wages,” which means you could have to pay income tax on it, like you do on your regular salary or hourly wage. Your employer will take the taxes on your bonus out of your paycheck for you, so you don’t have to figure it out on your own.
2020 federal income tax brackets
|Tax rate||Taxable income bracket||Tax owed|
|10%||$0 to $14,100||10% of taxable income|
|12%||$14,101 to $53,700||$1,410 plus 12% of the amount over $14,100|
|22%||$53,701 to $85,500||$6,162 plus 22% of the amount over $53,700|
|24%||$85,501 to $163,300||$13,158 plus 24% of the amount over $85,500|
The IRS says all supplemental wages should have federal income tax withheld at a rate of 22%. So for a $10,000 bonus , you would have $2,200 withheld in federal income taxes and receive $7,800. Your employer most likely will withhold this percentage from your bonus , because this is the simplest method.
While bonuses are subject to income taxes , they don’t simply get added to your income and taxed at your top marginal tax rate. Instead, your bonus counts as supplemental income and is subject to federal withholding at a 22% flat rate.
Employers must withhold federal taxes , Social Security and Medicare from bonuses . You can withhold a flat 25 percent of bonuses , if you wish, but it is more accurate to simply treat the bonus as regular pay and withhold at the same rate that you currently use for wages.