The 16th Amendment to the U.S. Constitution authorized the federal income tax, and the Internal Revenue Service is the federal agency tasked with collecting those taxes. The IRS considers all income that is not specifically exempted from taxation by federal law to be taxable income. Taxable income includes bonuses.
The Internal Revenue Service requires employers to report all employee compensation regardless of the form the compensation takes. Employee compensation may be in the form of wages, salaries, paid vacation, commissions, fringe benefits, tips and bonuses. The amount of the employee's pay, including bonuses, must be reported whether payments where made in cash, cash equivalents, merchandise or services.
You must report all income from self-employment, including any bonus income you receive. If you received more than $600 in compensation, including bonuses, from any single payer, that payer should provide you with a Form 1099-MISC. You are responsible for reporting all self-employment income, regardless of whether you received a Form 1099-MISC or not.
The federal income tax system is a pay as you go system. This means, federal income taxes must be paid on income as you earn it. If you work as an employee, your employer typically withholds federal taxes from your regular paycheck at rates based on information you provided when you filled out your Form W-4. The IRS refers to irregular payments, such as bonuses, as supplemental wages. Supplemental wages are subject to different withholding rates, typically 25 percent of the bonus amount unless your bonus exceeds $1 million per year, in which case the rate increases to 35 percent. If you are self-employed, you usually pay your taxes on a quarterly basis and will include all income, including bonuses, when you figure your quarterly tax payment.
Your total compensation for wages, including bonuses, will be taxed at the same rate when you file your federal income tax return, regardless of the rate at which taxes were withheld. The amount of any bonuses you received during the year will be combined with your wages, tips and any other compensation and reported in Box 1 of Form W-2 if you worked as an employee. The amount of any bonuses you received during the year will be combined with any other compensation and reported in Box 7 of Form 1099-MISC if you worked as an independent contractor or were self-employed.
- Internal Revenue Service: Publication 15, Employer's Tax Guide
- Internal Revenue Service: Understanding Taxes
- Internal Revenue Service: Publication 525, Taxable and Nontaxable Income
- Internal Revenue Service: Tax Withholding
- Lorman: IRS Provides Guidance on Proper Income Tax Withholding
- Internal Revenue Service. "Publication 525 (2019), Taxable and Nontaxable Income." Accessed Sept. 4, 2020.
Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.