A bonus from your employer makes you feel like your hard work is appreciated. You might worry, however, about the tax implications. Bonuses are regarded as supplemental wages because they aren’t regular wages. But, like regular wages, your bonus is taxable. If your employer is willing to pay the taxes for you, your problem is solved. Otherwise, your employer withholds at the required supplemental rate.
Federal Income Tax
Your employer uses Internal Revenue Service guidelines to figure the amount of federal income tax that should come out of your bonus. It uses one of two methods: aggregate withholding or a flat percentage. If your bonus is paid with your regular wages, your employer combines the two payments and deducts as though it were a single payment for your regular payroll. This is called the aggregate method; your employer uses your W-4 form and the federal tax tables to get your withholding amount. If it pays your bonus separately from your regular wages, it may deduct taxes at a flat 25 percent. If your bonus is more than $1 million, the excess amount would be taxed at 35 percent
The Federal Insurance Contributions Act gives employers the right to withhold Social Security and Medicare taxes from their employees’ wages, including bonuses. As of 2012, 4.2 percent comes out of your bonus for Social Security tax and 1.45 percent comes out for Medicare tax. Social Security tax has an annual wage base of $110,100, as of 2012. If you’ve already met the wage limit through your regular wages, your employer shouldn’t take any Social Security tax out of your bonus. Medicare tax is different. It comes out of all wages you receive for the year.
State Income Taxex
If your state says employees must pay state income tax, your bonus is taxable as well. The state has its own tax requirement for supplemental wages. For example, California wants 10.23 percent, Ohio takes 3.5 percent, and New Jersey uses the aggregate method.
Other Possible Withholding
If the local government says employees must pay city or county tax, your bonus would be taxed at whatever rate the municipality says. For example, the city of Yonkers allows the aggregate method if your bonus was paid with your regular paycheck. Otherwise, as of 2012, your employer takes 1.443 percent if you’re a resident of Yonkers and 0.50 percent if you’re a nonresident. Another possible withholding is state disability insurance. Let’s say you’re employed in California. As of 2012, SDI would come out of your bonus at 1 percent for the first $95,585 you earn for the year. If you’ve already reached the annual wage limit, state disability insurance would not come of your bonus.
If your employer pays all the taxes for you, it does what is called a “gross-up.” Although the taxes show on your pay stub, you get the full bonus amount.
- IRS.gov: Circular E, The Employer's Tax Guide
- California Employment Development Department: Rates, Withholding Schedules, and Meals and Lodging Values
- Ohio Department of Taxation: Employer Withholding
- New Jersey Department of Treasury: NJ Income Tax -Withholding
- New York State Department of Taxation and Finance: Publication NYS-50-T-Y
- Ceridian: Gross-Up Formula
- IRS. "Publication 15 (2020), (Circular E), Employer's Tax Guide." Accessed Nov. 5, 2020.
Grace Ferguson has been writing professionally since 2009. With 10 years of experience in employee benefits and payroll administration, Ferguson has written extensively on topics relating to employment and finance. A research writer as well, she has been published in The Sage Encyclopedia and Mission Bell Media.