US Tax News: Does your year-end bonus appear to be less than you anticipated? Just like the wages in a regular paycheck, bonuses are also subject to taxation. The IRS views them as “supplemental” income, which is often subject to different tax withholding regulations, in contrast to wages.
Bonus Tax Withholding Mechanism
According to tax experts, employers typically withhold tax from bonuses at a flat 22% federal rate. For any taxpayer whose federal marginal income tax rate is less than 22%, bonus tax withholding “will look like a big number,” according to Jeremiah Barlow, head of wealth solutions at Mercer Advisors.
Income Thresholds for Bonus Tax Withholding
There are a lot of taxpayers in that group. Married couples filing a joint return with income up to $89,450 and single people with taxable income up to $44,725 are included in that group for 2023. According to IRS statistics, 49% of individual tax returns in 2020 (or about 81 million) were in a marginal income tax bracket below 22%. Taxpayers in the 10% and 12% tax brackets are included in that figure; however, those in the 0% bracket are not.
Beyond Federal Taxes
Other withholdings, such as state and local income taxes, may also apply to a bonus. Furthermore, bonuses are usually liable to payroll taxes for Social Security and Medicare, which are 6.2% and 1.45%, respectively. “Very quickly someone might find themselves where (roughly) 40% is withheld,” said Matthew Fleming, a certified financial planner and senior wealth advisor at Vanguard. Additionally, employers are required to deduct a flat 37% from any bonus payments exceeding $1 million.
Optimism for Meager Bonus Checks
There is hope for those whose checks seem meagre. Fidelity Investments stated, “Fortunately, this means you could be due for a (tax) refund,” which would be equal to the additional amount your employer withheld. If you filed an annual tax return, you would get any refund that was due to you. Of course, it could also be the other way around. If their bonus was withheld at a flat 22%, higher earners—those in the 24%, 32%, 35%, or 37% federal income brackets—might find themselves owing the IRS more money when it comes time to file their taxes, according to Barlow. He went on, “Someone could easily fall into the 32% or 35% bracket with a sizable bonus, say $200,000.”
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