Why bonus taxed at higher rate

A bonus is money paid over and above normal wages. The IRS considers bonuses to be supplemental income, which is similar to commissions. Supplemental income is taxed the same way as normal pay. When an individual files the tax return, supplemental income is combined with normal wages and is subject to the same taxes and tax rates.

Bonuses are subject to federal income tax, Medicare tax, and Social Security tax. State income tax might also apply based on where you live. Employers can compute supplemental income withholding taxes in two ways. Before you call up payroll, take a breather. Bonuses are , in fact, taxed differently from your normal salary. According to the IRS, bonuses are considered supplemental income.

The IRS also recognizes that there are lots of different forms of supplemental income, like overtime pay, commissions, severance pay, awards, prizes and accumulated sick leave. Supplemental income is not held to the same taxing standards as regular income like a bi-weekly paycheck because supplemental income is situational, unlike salary.

Your employer also has the option to combine the bonus with your bi-weekly salary pay or pay it to you separately. Payroll taxes have almost nothing to do with your income taxes as an employee. You typically do not pay too much, too little, owe them on the tax return, or get them refunded on the tax return. They are a set percentage rate and withheld at that rate every time you get paid. Income taxes withheld have everything to do with your income tax returns.

You can have too much withheld, too little withheld, owe them on the tax return, or get them refunded to you. Properly filling out a Form W-4 and the state equivalent should get you to where you need to be with income taxes withheld.

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The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Skip To Main Content. Federal and state taxes While bonuses are subject to income taxes, they don't simply get added to your income and taxed at your top marginal tax rate.

For example, you will likely have to pay: The 6. The 1. Meeting your tax liabilities When it comes to actually paying taxes on your bonus, your employer has two options: the percentage method or the aggregate method.

Lowering your tax liabilities 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.

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