Organizations frequently take federal taxes from a bonus payment using a fixed 22% rate. This implies that anyone in a marginal tax tier beneath 22% could end up receiving a smaller amount than they anticipated, according to specialists. Additionally, bonuses usually are liable to state and local taxes, and payroll taxes for Social Security and Medicare. Taxpayers may be able to receive a repayment of any excess taxes they paid when tax season arrives.
Is your year-end bonus less than you were anticipating?Tax withholding is very likely the reason — however, when you file an annual tax return, you may receive a refund from Uncle Sam, according to experts.Bonuses are seen as taxable income, just like wages from a usual paycheck.But unlike wages, the IRS regards them as "supplemental" income, which usually has separate tax withholding policies.
Employers normally withhold tax from bonuses at a federal rate of 22%, according to tax consultants. Because of this, Jeremiah Barlow, head of wealth solutions at Mercer Advisors, noted that a bonus tax withholding "will appear considerable" for those whose federal marginal income tax rate is less than 22%. This includes single individuals with a taxable income up to $44,725 in 2023, as well as married couples who file a joint return with income up to $89,450 that year. IRS statistics show that in 2020, nearly 81 million individual tax returns (49%) were in a marginal income tax bracket less than 22%, excluding those in the 0% bracket.
Bonuses could also be subject to other withholding, like state and local income taxes. In California, employers withhold supplemental wages in the amount of 10.2% of the state rate, Barlow explained. This means that bonuses for residents of this state would probably be withheld at a rate of 32.2% - a combination of federal and state taxes.
Moreover, bonuses are generally liable to the Social Security and Medicare payroll taxes, composed of 6.2% and 1.45%. According to Matthew Fleming, a certified financial planner and senior wealth advisor from Vanguard, this could lead to a sizable sum being taken out of a bonus quickly. On top of this, if a bonus is over $1 million, then employers are expected to hold back 37%.
An alternative approach employers can take is to combine the bonus with the employee's usual paycheck, and the wages would be subject to the customary income-tax rates.
Those who feel their paycheck is on the small side can take comfort in the fact that they could be due for a tax refund due to the extra amount their employer withheld, as commented by Fidelity Investments. The refund would be received when filing an annual tax return. The other side of the coin is that higher earners may owe the IRS more money when tax season comes, particularly if the bonus was taken out at a flat 22%, according to Barlow. For instance, if a bonus of $200,000 is received, the individual could easily fall into the 32% or 35% bracket. Therefore, Barlow advised not to assume that the amount of the bonus taken out would cover the sum.
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