Working hard all year to help your company meet its annual goals deserves a reward, and you've definitely earned that bonus. But bonuses count toward your income for the year, so they're subject to income taxes. Read on to learn how much tax you can expect to pay on your bonus—and for tips on reducing your tax liability.
- How much are bonuses taxed?
- Are bonuses subject to both federal and state taxes?
- What other tax liabilities are bonuses subject to?
• If your employer issues you a stand-alone bonus check, your employer has some control over the withholding method bonus if it is $1 million or less. A common method is to use a flat 22% withholding rate for 2022.
• If your bonus exceeds $1 million, the first $1 million is subject to the same withholding as above while the amount above $1 million is subject to a 37% flat withholding rate.
• If your employer lumps your bonus into your regular pay, standard payroll withholding rules will typically be applied to it.
• Bonuses can be subject to state income taxes as well. These tax rates vary by state.
• You typically have to pay payroll taxes including the 1.45% Medicare tax plus the 6.2% Social Security tax on the amount of your wages, including your bonus. However, the Social Security tax is limited to the first $147,000 of wages for the year (tax year 2022).
How much are bonuses taxed?
While bonuses are subject to income taxes, the IRS doesn’t consider them regular wages. Instead, your bonus counts as supplemental wages and can be subject to different federal withholding rules than your regular wages. How much your employer withholds from your bonus depends on several factors, but generally if your bonus is equal to or less than $1 million, your bonus will be included with your regular pay and subject to standard payroll withholding or subject to a flat 22% withholding rate.
Example: If you receive a $6,000 bonus for the year and the flat withholding rate is use, you'd have 22% or $1,320 withheld in federal taxes to be sent to the IRS ($6,000 x .22 = $1,320).
If you receive a very large bonus—over $1 million—you'll likely have 22% federal tax withheld on the first million, then 37% on bonus funds above the first million.
Example: If you received a $2 million bonus, you'd pay $590,000 in federal tax withholding:
- $1,000,000 x .22 = $220,000 tax on first million
- $1,000,000 x .37 = $370,000 tax on second million
- $220,000 + $370,000 = $590,000 total tax
Are bonuses subject to both federal and state taxes?
Your bonus may also be subject to state taxes, although the withholding rate will vary depending on your state.
What other tax liabilities are bonuses subject to?
In some cases, you might have additional tax liabilities on the income from your bonus. For example, you'll likely have to pay:
- 6.2% Social Security tax on all of your wages including your bonus up to the $147,000 Social Security cap for tax year 2022
- 1.45% Medicare tax on all of your wages including your bonus
TurboTax Tip: To reduce your tax liability, you can invest your bonus in your 401(k) or IRA. If you expect to retire or take a pay cut in the next tax year, you can ask your employer to defer your bonus until that year begins so that it might be taxed at a lower rate.
How are bonuses taxed?
When it comes to actually withholding taxes on your bonus, your employer has two options: the percentage method or the aggregate method.
The percentage method is simplest—your employer issues your bonus and withholds taxes at the 22% flat rate—or the higher rate if your bonus is over $1 million.
The aggregate method is used when your employer issues your bonus with your regular salary payment and uses the total amount to calculate the amount of withholding. For example, if you normally withhold 35% of your pay for income taxes, the amount of withholding on your bonus would also be 35%.
Using the aggregate method doesn't mean that you actually have to pay more tax on your bonus. You'd likely qualify for a refund for withholding too much tax money. But it does mean that you could see less of the cash from your bonus upfront.
Use this bonus taxation calculator to figure out how much tax you'd pay on the amount of your bonus using either method, so you can know exactly how much money to expect.
When are taxes on bonuses paid?
Taxes for the bonus will be withheld from your paycheck by your employer. If the amount of taxes withheld from your paycheck doesn’t cover your total tax liability for that bonus, you may owe taxes when you file.
Why are bonuses taxed so high?
Since bonuses are paid in addition to your normal paycheck, they are taxed at a higher rate than your regular wages. This is because they are considered supplemental income.
In general, everything that falls under “supplemental income” is subject to different requirements, including how it is dispersed, reported, and taxed.
Are all types of bonuses taxable?
Bonuses are always taxable because they are income under Section 61 and no IRC section excludes them from taxation.
However, if you receive fringe benefits–for example, tickets to an event or gift baskets–these may not always be considered taxable. Fringe benefits are considered a separate form of pay or remuneration.
Specialty rules may also apply to achievement awards that may be given as an alternative to a traditional bonus. These achievement awards can’t be categorized as:
- Cash equivalents
- Theater or sports tickets
It’s important to correctly determine whether fringe benefits or bonuses are taxable. The frequency and value of the gift will affect whether you’ll need to pay taxes.
For help navigating your tax liability on bonuses and fringe benefits, speak with a tax professional who can advise based on your circumstances.
How can you avoid taxes on bonuses?
While you can't avoid paying taxes on your bonus entirely, you can use your bonus funds wisely to reduce how much you'll owe at tax time.
How can you lower taxes on bonuses?
There are several ways you can lower the amount you pay in taxes for your bonuses.
The first method for lowering your tax liability is to reduce your taxable income:
- Use the funds to invest in your 401(k) or IRA to get a tax break.
- If you expect to take a pay cut in the next year—for example, if you're ready to retire—ask your employer to defer your bonus until the following tax year to lower your overall tax liability.
- Contribute to a health savings account (HSA) to reduce your gross income.
The other method for lowering your tax liability is to itemize your deductions and:
- Use your bonus to pay for out-of-pocket medical expenses that aren’t reimbursable.
- Note: For this to be applicable, your expenses would have to be over 7.5% of your AGI and you would need to itemize your expenses when filing your taxes.
- Make a donation to charity.
While your bonuses will always be taxable, you can find ways to lower your tax burden by postponing, deferring the bonus, or generating deductions.
Will you receive a refund if you overpay taxes on your bonus?
In some cases, your employer may mistakenly withhold too much from your bonus pay. If more tax was withheld from your bonus than you actually owed, you may receive a tax refund.
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