How Much Are Bonuses Taxed: A Simple Guide
6 MIN READ
Published October 12, 2023 | Updated November 10, 2023
If you’ve earned a bonus from your employer, you may be surprised to see that the amount deposited in your bank account is lower than you expected. IRS views bonuses as an income. So, how much are bonuses taxed? Generally, you’ll need to pay a flat rate of 22% in federal taxes, but the calculation may differ based on the type of bonus and the amount you receive.
Are Bonuses Taxed Differently?
Any income you earn outside of your normal base pay is considered supplemental income. For employees, this means commissions, bonuses, and severance pay. Each type of supplemental income is subject to a different tax treatment.
Your employer will withhold a portion of your bonus for taxes because it counts towards your total income for that year. You won’t have to pay any additional income tax when you file your tax return in April if your employer has withheld enough. But if your employer has withheld too little or too much during the year, that may mean either a tax debt or a refund.
Brad Reichert, Founder and Managing Director of Reichert Asset Management LLC, explains the reason behind taxes for bonuses:
“The reason why the IRS and various states require special withholding on supplemental income like your annual bonus is to help you avoid the possibility of a last-minute surprise come tax time in April,” Reichert shares. “If you end up receiving more money than you expected during the year, from bonuses, commissions, etc, your total income may bump you up into a higher marginal income tax rate, at which point you may end up owing much more income tax than you would in a ‘normal’ year.”
Are Bonuses Subject to Both Federal and State Taxes?
Like any income you earn, your bonus may be subject to federal as well as state taxes, depending on where you live. Knowing how your income and your bonuses are taxed will allow you to determine your gross vs. net income.
Determining how much are bonuses taxed will depend on several factors, such as the amount you receive and the type of bonus. The bonus you earn counts as supplemental income and may be subject to different withholding rules compared to regular income. Generally, if you receive a bonus of less than $1 million, you will be subject to a flat 22% withholding rate.
For example, if you receive a bonus of $5,000 for the year, you’ll be liable for 22% in federal taxes. This means your employer may withhold $1,100 (22% of $5,000) to send to the IRS.
Different states have different regulations on supplemental taxes. Supplemental tax rates can vary from 2% to 11% in different states. Some states do not have any income tax, while some do not have any supplemental taxes.
For example, states like Alaska, Florida, and New Hampshire do not have income taxes. Some states that have income tax but no supplemental tax include Arizona, Colorado, Hawaii, Kentucky, and Indiana.
Let’s consider an example. Your employer pays you a bonus of $500, and you live in Kansas, where the rate of supplemental tax is 5%.
- First, you’ll pay a federal tax of 22%, which comes to $110 (22% of $500).
- Next, you’ll pay a supplemental state tax of 5%, which comes to $25 (5% of $500).
- After accounting for both federal and state taxes, you’ll receive $365 on hand.
Other Tax Liabilities Bonuses May Be Subject To
- 1.45% Medicare tax on your income, including bonus.
- 6.2% Social Security tax on your income, including bonus, up to $147,000 (Social Security cap for 2022).
Tax Methods and Withholdings for Bonuses
Employers can use two different methods to determine how much tax they should withhold when giving out bonuses.
This is the most common and the easiest method most employers use when calculating taxes on bonuses. With this method, your employer will send you a separate bonus payment after deducting a flat 22% for federal taxes if it is under $1 million. If it is over $1 million, the employer will deduct 22% of $1 million and then 37% for any amount over it.
You may not owe 22% in federal taxes on your bonus. Your real tax liability will ultimately depend on your filing status and your taxable income. If the tax withholding is too high, you’ll receive a tax refund.
For example, if your bonus is $2,000, your employer will withhold $440 (22% of $2,000), and your take-home bonus pay will be $1,560 after tax deductions.
With the aggregate method, your bonus will be included in your regular paycheck. This means that the employer will add the bonus amount to your pay and withhold taxes based on your tax filing status, deductions, and other information you included on your W4 form. This may put you in a higher tax bracket, and the employer may end up withholding too much, but you’ll receive a refund if you have overpaid taxes.
Let’s consider you are filing as a single filer, and your biweekly pay is $2,000. You receive a bonus of $1,000 during the pay period, which makes your total biweekly pay $3,000. Based on federal income tax rates, you’ll pay the standard withholding tax of $362 in federal taxes.
The Bottom Line on How Bonuses Are Taxed
Don’t be surprised to see a lower amount in your bank account when you receive a direct deposit or a bonus check. Bonuses are earned income and are subject to taxes. How much are bonuses taxed? This will depend on the calculation method your employer uses, the amount you receive, and the state you reside in.
You can minimize your tax burden by reviewing your W4 to ensure that all the information is correct. This is the information your employer uses to determine federal withholdings, so it’s important to ensure it is correct.