What You Need to Know About Bonuses

When you get a bonus at work, it’s normal to feel happy and excited. You should know, however, that bonuses, like all income, are taxable. They are considered, by the IRS, as “supplemental wages,” and thus, may be taken from your taxes via the percentage method or the aggregate method, depending on the specifics.   

The Percentage Method

It is typically up to your employers to determine which method will be used to tax your bonus. More often than not, however, employers choose the percentage method, through which 25% of your bonus is given to the IRS.

This method is favored by employees because it’s the easiest and simplest way to apply taxes to supplemental income. Plus, this method tends to take less of your bonus than the aggregate method, so it’s actually a good thing for you that most employers prefer the percentage method.

The Aggregate Method

While the aggregate method isn’t used as often as the percentage method, it still exists and is used fairly regularly. It’s mostly used when your employer chooses to pay your bonus into your regular paycheck. When this happens, the employer will determine the normal withholding amount based on your paycheck plus the bonus, subtract any withholdings taken from your last check, and then withhold the remainder from your bonus amount.

Not only is this method complex and even confusing for everyone involved, but it also means you often get taxed more than you would have if just a flat 25% had been taken from your bonus.

Unfortunately, though, you can’t control which method of taxation your employer chooses. As a result, you’ll just have to enjoy the fact that at least you got a bonus! Plus, now, at least, you’ll be able to clearly understand where some of your money went so you don’t end up confused.