Getting a performance bonus or monetary Christmas gift from your employer at the end of the year is always exciting – until you see how much tax has been taken out. As with the rest of your pay, both the federal and state governments get their cut before you get to enjoy the extra cash in your pocket. But not all state bonus taxes are created equal. Depending on the state where you work, state law will require your employer to use a certain method.
States and Tax Methods
Your federal income tax is applied at your marginal rate, say 28 percent. Any additional pay, such as a bonus, is taxed as supplemental income at a flat percentage rate. States use their own tables for supplemental payment. They use either the aggregate or percentage method, or the flat rate method, depending on whether supplemental wages are paid with regular income or separately.
Most states use the IRS definition of supplemental wages which is “compensation paid in addition to the employee's regular wages that includes, but is not limited to, severance or dismissal pay, vacation pay, back pay, bonuses, moving expenses, overtime, taxable fringe benefits, and commissions.”
Aggregate versus Flat Tax Method and States
When states tax supplemental wages, they will use either the aggregate or flat method. The flat method separates the supplemental from regular wages and taxes it as a percentage, 25 percent for example. With the aggregate method, the supplemental is added to regular wages and taxed at your regular tax rate. In other words, it treats bonuses and commissions as regular pay for tax purposes. Any taxes already withheld are taken from the regular pay and then from the supplemental.
Most states use the aggregate method. The states with no personal income tax do not tax supplemental income. These are: Alaska, Florida, Nevada, New Hampshire, Tennessee, Texas, Washington and Wyoming. A few states have a flat personal income tax which also applies to supplemental income: Colorado, Illinois, Indiana, Massachusetts, Michigan, Pennsylvania and Utah. Calling or going online to your state tax assessor’s website will let you know whether there are any additional rules in your area.
An employer has to withhold federal income tax from all pay, even supplemental. Revenue rules and sections of the IRS code dictate the amount that must be withheld. For example, supplemental income under $1 million is taxed at a flat rate of 25 percent. This covers most taxpayers. The few who receive bonuses and commissions about the $1 million amount will be taxed at a mixture of the flat rate and percentages.
Help and Online Tools
To get help understanding how your bonus or other supplemental income will be taxed, you can always call the IRS or your state tax authority. There are also some online tools that can calculate how much will be taken out. Most automatically adjust for states that use the aggregate versus flat tax method.
Monica Sanders has been a writer for more than 10 years, seven of which were in television and online journalism. She holds a Bachelor of Science, Juris Doctor and Master of Laws and has published articles and columns ranging in subject from legal and international business issues to personal finance.