If you got a bonus at your job, you may have noticed a lot more in taxes taken out than normal. This may be annoying, but you’ll get it back at the end of the year. Here’s what’s going on.
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How is a bonus taxed?
A bonus from an employer is just extra wages. A $1,000 bonus is no different than if your salary had gone up by $1,000. If you’re hourly, it’s the same as if you worked enough hours to make an extra $1,000.
You’ll pay income taxes and FICA taxes on your bonus as usual. If you have non-tax withholdings, check with your employer for their policy. For example, ask if your 10% 401(k) contributions get taken out of your bonus as well.
Why does a bonus get taxed higher?
A bonus may result in having more taxes taken out of that paycheck. This is due to withholding calculations getting tricked into thinking you’re making more for the entire year than you will.
If you normally make $5,000 per month, your withholdings will usually be based on a $60,000 annual salary. If you get a $5,000 bonus in one month for a total monthly paycheck of $10,000, your withholdings for that month will be based on a $120,000 annual salary. That results in having more money withheld than if the calculation was based on your true $65,000 per year income.
Another way your bonus may get taxed higher is if your employer pays it separately. When your employer separately identifies a bonus, the income tax withholding rate is simply 22%. It doesn’t go by your income. If you’re in a lower tax bracket, you’ll have extra withheld from your bonus.
Will you get the extra taxes back?
Yes, the income tax you pay depends on your actual income for that year. If you paid too much in income taxes during the year, including because of extra taxes taken out of your bonus, you will get a refund when you file your tax return.
Can you adjust the withholdings on your bonus?
If the bonus is paid separately, your employer can’t adjust the default 22% withholding. If your employer pays the bonus with your regular paycheck, you can adjust your withholding to have the right amount of taxes taken out.
However, this is often more trouble than it’s worth. You’d need to do the math, go to HR to update your W-4, and then go back to HR to readjust your W-4 after the bonus.
Can you owe additional taxes on a bonus at the end of the year?
While a bonus usually results in you getting taxed more, it’s possible to not pay enough taxes on your bonus. The most common situation is if your tax bracket is higher than 22% and your employer only withheld 22% in income taxes.
You may also owe additional taxes if you’ve adjusted your W-4 to reduce your withholding either for the bonus or in general.
Can a bonus push you into a higher tax bracket?
It’s possible that a bonus could get taxed in a higher tax bracket. If you were making $1 less than the 12% tax bracket before your bonus, your bonus would push you into the 22% tax bracket. This doesn’t mean that your entire income gets taxed at 22% instead of 12%, though. Only the bonus gets taxed at 22%. All the money you made up to the amount of the 12% bracket still gets taxed at 12% (actually less because there are also 0% and 12% tax brackets).
Can a bonus ever cost me more money in taxes than the bonus?
There is a narrow set of circumstances where a bonus could cost you more in taxes than the bonus. Certain tax credits and deductions do have cutoffs where you get all or none.
For example, the Saver’s Credit has a cutoff of $65,000 for joint filers in 2020. If you were just below $65,000 before your bonus, your bonus could make you lose your Saver’s Credit.
However, you usually have options besides refusing the bonus. In most situations, if you still have room in your IRA or 401(k), you can make a deductible contribution with your bonus so it doesn’t count as income that brings you over the cutoff. If you’re trying to qualify for this type of credit and are worried about your bonus, use a tax calculator or talk to a tax advisor.