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.