Tax on Cash Bonuses

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Any compensation you receive in exchange for work, including cash bonuses, is taxable income according to the Internal Revenue Service (IRS). Such bonuses may be in the form of cash or cash equivalents, such as checks. Employees are required to report bonuses on the employee's W-2 form each year, and self-employed individuals must also report bonuses on a Form 1099-MISC.

Employee Bonuses

The Internal Revenue Service (IRS) considers as taxable income all amounts you receive as payment for performing a personal service as an employee. The payment may be in the form of money (cash or cash equivalent such as a check), property or services, or barter. Bonus income must be reported whether or not the payment was made in cash and whether or not the amount was reported as income on the employee's W-2.

Self-Employment Bonuses

An individual who is self employed must report any cash bonuses she received during the year as part of her income when she files her federal income tax return. This is the case whether or not the amount was included on a Form 1099-MISC. She must report the bonus whether it was paid in cash or in a non-cash form such as merchandise or services.

Reporting

Employers should report cash bonuses paid to employees on the employee's Form W-2, Wage and Tax Statement. The amount should be included in Box 1 (wages, tips, other compensation). The employer should also withhold all appropriate federal income taxes, social security taxes and Medicare taxes from the bonus. If your employer does not report the cash bonus on your W-2, you are still required to report it and pay taxes on it. If you are self employed and you receive more than $600 including any cash bonuses from a single source, the source should supply you with a Form 1099-MISC. You are responsible for reporting the amount of the cash bonus whether or not you have received a Form 1099-MISC.

Considerations

The IRS considers gifts to employees to be reportable and taxable income, regardless of whether the gift was made in the form of cash or merchandise. This includes gifts to independent contractors such as babysitters, lawn care personnel, and housekeepers as well as full-time employees. Cash bonuses may significantly increase your tax liability, if the amount of the bonus is enough to push you into a higher tax bracket.

References

About the Author

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.

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