What You Need to Know about Bonuses

 

Everyone loves finding out that they’ll be getting a bonus at work. After all, it basically seems like free, extra money. Unfortunately, however, bonuses aren’t truly “free,” at least not when it comes to taxes. The IRS considers them as “supplemental wages,” which means that, just like severance pay or overtime, they’ll be taxed.  

Big Bonuses  

While most bonuses are small and run of the mill, sometimes you might get lucky enough to earn a truly big bonus, like $1 million or more. If you’re fortunate enough to have this happen to you, you’ll first be hit with a 22% withholding rate. Then, money received over $1 million takes you to a 37% withholding rate. That type of taxation is pretty steep, but, hey, it’s still better to get a bonus than to not get one at all, right?  

Average Bonuses  

What about more average-sized bonuses, like those under (or even well-under $1 million)? All bonuses under $1 million can be taxed at a flat 22% if your employer chooses to use the percentage method. Alternately, your employer could choose to utilize the aggregate method, in which your withholding would be calculated on your regular pay and on your bonus. Your employer basically uses your normal withholding rate and subtracts it from the total withholding to determine how much to withhold from your bonus.  

As you can imagine, all of this can get a bit confusing. However, don’t let taxation, which is just a fact of life, get you down. Learn how to make the most of your bonus and better understand how it’s taxed by working with a tax professional. After all, if bonuses are going to be a regular part of your life (and hopefully they will be!), you want a professional who can show you how to put that extra money to work for you.