Disadvantages of percentage methodĪ flat percentage of withholding may not accurately reflect how these wages get taxed on your return. It’s also easier for you to determine how much federal tax withholdings will impact your bonus payment. This is the prime reason so many employers choose this method. The biggest advantage of the percentage method is that it’s easy to calculate. This brings Jane’s total federal tax withholding on her bonus to $331,000. Her employer withholds 22% of the first $1M and an additional 37% on the remaining $300,000. In another example, Jane receives a $1.3M bonus. This brings John’s total federal tax withholding on his bonus to $770. His employer will withhold 22% of this bonus for federal taxes. When using the percentage method, employers withhold 22% for taxes on the first $1M and an additional 37% on any portion of the bonus over $1M.įor example, let’s say John receives a $3,500 bonus. In most cases, when employers disperse bonuses as a separate payment, it typically means they're using the percentage method. The percentage method is a popular method for many employers because it’s the easiest option to calculate. Below is a closer look at these two methods, along with examples and the pros and cons of each type. When it comes to workplace bonuses, the IRS gives employers two options: the percentage method and the aggregate method. Generally, your employer can choose between two methods of withholding federal tax on your bonus. How these withholdings affect you personally depends on your overall bonus amount(s), W-4 information, and the method your employer uses to calculate withholdings. Since the IRS views bonuses as supplemental income, employers must withhold taxes on bonuses according to IRS regulations for supplemental income, which is a separate withholding calculation than your regular wage or salary pay. You’re likely to notice the biggest difference when you receive your bonus. This form will be needed to file your 2022 tax return. Since your bonus is subject to federal tax, your W-2 (the wage and tax statement provided by your employer by the end of January of the following year) will include this pay in Box 1, which reports the amount of wages subject to federal taxes. You might be subject to Medicare and Social Security tax, unemployment tax(es), and depending on where you live, you may also have to pay local and state taxes. However, it’s not just federal tax you have to consider. The IRS considers bonuses a form of wages, and as such, they're subject to federal taxes, just like your normal pay. ![]() Regardless of when you receive it, it’s important to understand the tax implications of receiving a work bonus before your employer distributes it. In fact, unless it’s explicitly noted in an employee agreement, there’s no obligation for employers to distribute bonuses. However, employers can disperse bonuses at any time throughout the year, if they choose to offer them at all. ![]() ![]() Employers often distribute bonuses near the holidays, at the end of the company’s fiscal year, or once an employee reaches certain goals. ![]() What is a bonus?Ī bonus is a form of compensation employers pay their workers over and above their regular wages. This guide explains what bonuses are, how the bonus tax rate works, and the steps you can take to reduce the tax impact of this extra income. What you may not know is that the IRS considers bonus pay a form of earnings known as supplemental wages, which is subject to a separate tax withholding table than your regular pay. Employers often hand out bonuses based on performance, company success, years of service, or other metrics of a job well done. If you've received a bonus at work, congratulations are in order.
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