If you got a bonus, you might have noticed a lot more in federal taxes taken out than normal. You’ll get it back at the end of the year.
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.
Are bonuses subject to payroll tax?
You’ll pay federal income taxes and FICA taxes on your bonus as usual. Even though bonuses are called supplemental wages for certain accounting rules, your tax liability doesn’t change from regular wages.
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 is my bonus taxed so high?
Employers have two options for how they can calculate bonus tax withholding. Both can result in you having too much taken out in taxes.
Bonus Aggregate Method
When you receive a bonus, your payroll department’s withholding calculations get tricked into thinking you’re making more for the entire year than you will.
If you normally make $5,000 per month, your federal tax withheld 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.
Bonus Percentage Method
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 a flat rate depending on the amount of your bonus. It doesn’t go by your income.
If your bonuses during the year total up to less than $1 million, your employer will withhold 22%. If your bonuses total more than $1 million, your employer will withhold 37%.
This is not a separate bonus tax rate. Bonuses are taxed at your regular income tax rate depending on your total income from the year.
If you’re in a lower tax bracket, this can result in having extra taxes withheld from your bonus. You’ll get a refund when you file your tax return.
If you’re above the 22% tax bracket but your bonus gets withheld at the 22% rate, don’t forget to set aside extra for taxes.
Why are bonuses taxed at 40%?
This is a frequently asked question based on misinformation. There is no 40% tax rate on bonuses.
Depending on your withholding, it’s possible that your employer might withhold about 40% in taxes when you receive your bonus. See the information above for why.
When you file your tax return, you’ll pay the correct rate according to your tax bracket.
Will I get a tax refund on my bonus?
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 get an early tax refund if you need the money from your bonus?
The only way to get a tax refund from the IRS is to file a tax return during filing season. You can’t request an early tax refund even if it’s clear you paid way too much in taxes.
Can you adjust the withholdings on your bonus?
If the bonus amount is paid separately, your employer can’t adjust the default 22% or 37% 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 avoid taxes on your bonus check?
There is no way to completely avoid taxes on your bonus check. Bonuses are taxable income.
If you have room in your 401(k), IRA, or HSA, you may be able to make a deductible contribution equal to your bonus amount to cancel out the income taxes on your bonus. In most cases, you’ll still need to wait until you file your tax return to get your refund.
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. Crossing the line to the 22% bracket 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%. And, don’t forget you have a 0% bracket to fill before you get to the 12% bracket.
Do you have to pay Social Security taxes on your bonus?
Yes, a bonus from your job is the same as your regular pay. You pay income taxes and FICA taxes on your bonus check. It doesn’t matter if it’s a regular bonus, a year-end bonus, or considered supplemental income.
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 $68,000 for joint filers in 2022. If you were just below $68,000 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 to keep your taxable income below 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.