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One of my first jobs was to receive an annual bonus.
I can’t recall the numbers.
However, I will always remember how amazed I was to see this. You get much moreI received more than what I was told in my end of the year review. Thanks, taxes.
I am not the only one puzzled by the case of missing bonuses. I reached out Lisa Greene Lewis, Certified Public Accountant. TurboTaxAsk yourself: Is my bonus higher than my regular income?
Why is the tax on bonuses so high?
The IRS considers bonuses “supplemental income” and taxes them heavily. While all your earnings are equal at tax time (taxes are the same for everyone), bonuses are considered supplemental income by IRS and are subject to higher taxes. Withholding rate.
This is most likely the withholding that you are noticing on a shrunken Bonus Check. There are two ways employers can take taxes from your check:
The percentage method.If your employer sends you a separate check containing your bonus money, this is the method they will use. To keep things simple for your company, they simply withhold tax at a flat 22 percent (if you earn more than $1 million, the highest income tax rate is used, currently at 37%). This also applies to other income sources that are considered supplemental like severance pay and commissions.
The total method.If you receive a bonus in addition to your regular paycheck, your employer will use this method. Your bonus and regular earnings will be subject to tax withholding by your employer according to the information you shared with them on your W-4. Your employer will withhold more money because you are receiving more than usual.
In fact The IRS offers a handy calculatorIt calculates your tax withholding based on your income. This will help you to be prepared. Greene-Lewis claims that, depending on your income level and tax rate you may get some of this money back. Refund of tax.
Tax deductions may be possible to offset large bonuses
Taxes are not something you can do if your bonus is less than $100,000. You have options if you receive large amounts of cash.
“Maybe you can increase your retirement savings,” or, if you itemize, you can donate to your favorite charity and get a deduction, Greene-Lewis suggests.
Greene-Lewis states, “If you have a home,” “you might be able to maybe.” Prepay your mortgagePrepay your property taxes or take a larger deduction.” However, this is subject to the State and Local Tax limits. Although none of these options will allow you to keep more, they offer tax breaks that could offset any tax due on your bonus.
Another option is to defer your bonus to a future tax year.
Some people receive their bonuses in January and February while others get them around the holidays. Greene-Lewis says that many employers prefer to pay holiday bonuses in December, as they can write it off if their books close December 31.
If you’re interested in this plan, your bonus is enough to motivate you. Another tax bracketAsk your company if they will defer your bonus payment until next year.
This comes in handy if you expect your income to decrease in the new year, or if you expect your deductions to increase substantially enough to offset the taxes — for example, if you’re planning to buy a house.
Although you may think that employees would be better served tax-wise if they were given gradual bonuses over a series or year-round raises, Greene-Lewis states that a company’s ability pay bonuses depends on when its accounting is done for the year.
Sometimes, these bonuses must be paid before the year ends. Employees end up receiving lump sums because the company doesn’t know how much money it can afford until the very last minute.
