Receiving a bonus from your employer as reward for a job well done is a welcome event, but not so for the taxes you’ll probably end up having to pay on it. Rest assured the IRS expects its cut, and depending on where you live, bonuses can also be taxed on a state level as well. For tax purposes, your bonus is generally considered supplemental wages, which are subject to different withholdings than your regular income. If you reside in the state of Illinois, you are responsible for paying federal taxes on your bonus, in addition to Illinois state supplemental income tax withholdings.
What Constitutes Supplemental Wages?
The IRS defines supplemental wages as “payments to an employee that aren't regular wages.” Simply put, bonuses, overtime, payment for sick leave and commissions – among other things – are considered supplemental wages. There are two ways these supplemental wages are taxed, depending upon whether you receive these wages as part of your regular paycheck, or if you receive them as a separate payment. However, if your bonus and other supplemental wages exceed $1 million, then you are automatically taxed at the highest tax rate for any amount above this threshold, which at time of publication is 39.6 percent.
Percentage and Aggregate Methods of Taxation
If your bonus is not included in your paycheck, your employer will likely opt to withhold taxes at the flat 25 percent supplemental tax rate set forth by the IRS. For example, if you receive a $10,000 bonus as a separate payment from your regular paycheck, you would have $2,500 in taxes withheld. Known as the percentage method, this method of taxing bonuses or other supplemental wages is often preferred by employers as it’s less time consuming and easier to tax the entire bonus at a single rate. For the taxpayer, having the bonus taxed at a uniform 25 percent can result in less of a tax hit than if you’re taxed using the aggregate method.
The aggregate method of taxing supplemental income is a bit more complicated and involves the use of tables. This method applies when you receive your bonus on your regular paycheck, and it almost always results in paying more in taxes than the percentage method. The reason for this is because taxes are withheld for the combined amount of your normal pay plus your bonus. Your employer uses IRS withholding tables to calculate the total of both amounts. Next, she will subtract what you had withheld from your last paycheck. And lastly, she will withhold any difference from your bonus amount. Also, along with your bonus, you could find yourself in a higher tax bracket for the year. If you believe you will earn less income in the following year, discuss having your bonus deferred. This would lower your tax obligation for the current year and could keep you from having some of your income taxed at a much higher bracket.
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Taxing Bonuses in Illinois
After you’re done with federal taxes on your bonus, you now have to handle your state tax requirements. In Illinois, supplemental and standard wages are taxed at 4.95 percent. Your employer will consider the number of allowances you claimed on your IL-W-4, and use the withholding tables in Booklet IL-700-T, to determine how to tax your bonus in Illinois. In the event you receive your bonus along with your regular paycheck, your employer will add both your regular wage and supplemental wages, then tax this amount at the 4.95 percent.
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