Receiving a bonus at work is always an exciting surprise. But before you spend it all to fund a vacation or pay off some bills, you might be wondering if your bonus is taxable.
The short answer: yes, your bonus is taxable.
Unlike the regular paycheck you receive from your employer, any bonus payments are considered supplemental wages, which means your bonus will be taxed — and they will be taxed more than the standard income rate. These same tax rules apply to more than bonuses, including moving costs, tips, overtime, and severance.
When you receive a bonus, your employer will also withhold a designated amount sent to the Internal Revenue Service. AA Tax & Accounting Services has put together a quick guide to help you calculate how much of your bonus will be taxed.
How to Calculate the Taxes on Your Bonus
How much of your bonus will you be able to put the deposit into the bank? To determine how much of your bonus will be taxed, consider the following factors:
- Social security tax – As of 2020, you are required to pay socials security tax on any compensation received up to $137,000. Your employer will take out 6.20% from your bonus check for social security until you hit this benchmark.
- Medicare tax – Any compensation you receive much have medicare tax factored in. This means your employer will deduct 1.45% of the total bonus for Medicare tax.
- Federal income tax – The standard federal tax rate is 25% — however, under tax reform, this number has been adjusted to 22% for bonus withholdings. If your employer withholds more than 22% for federal income tax, you will receive that overpayment back in the form of a tax refund when you file your annual taxes.
- State income tax – The majority of states require residents to pay state income tax, which applies to bonuses. Depending on the state you work in, your employer will withhold the designated amount required by state law.
- 401k contributions – If you contribute to a 401k with your standard paycheck, you will likely have a portion withheld from your bonus as well. This percentage will vary depending on the number you have set with your employer
All of these must be considered when determining how much of your bonus check will be withheld. To help illustrate these withholdings, we’ve put together an example calculation to demonstrate how you could calculate these numbers based on a $15,000 bonus check:
- $15,000 x 25% = $3,750 in Federal tax
- $15,000 x 5.25% = $787.50 in State tax (if applicable)
- $15,000 x 1.45% = $217.50 in Medicare tax
- $15,000 x 6.2% = $930 in Social Security tax
Using this example, you would deduct a total of $5,685 from the $15,000 bonus — which is a tax rate of 37.9%!
Tax Consulting Services in Cedar City, Utah
Suppose you have received a bonus or will be receiving one and have questions regarding supplemental income tax withholding. In that case, we recommend consulting certified public accountants like AA Tax & Accounting Services. Our team can help you better understand how your bonuses will be taxed and prepare you for the upcoming tax season, where it might be possible to recoup some of it through a tax refund. We have the experience to guide business owners on the best strategies for maximizing their deductions and tax credits with our tax consulting services.
The AA Tax & Accounting Services team can help you navigate the tax process when receiving supplemental income from your employer. Contact us to schedule an appointment for tax consulting services.