Jgi/tom Grill | Tetra Images | Getty Images
Does your year-end bonus look smaller than anticipated?
Tax withholding is a probable wrongdoer — however Uncle Sam could pay some again if you file an annual tax return, specialists stated.
Bonuses are handled as taxable earnings, like wages in a typical paycheck.
However, not like wages, the IRS treats them as “supplemental” earnings, which is usually topic to completely different tax withholding guidelines.
Why the tax could seem excessive
Most usually, employers withhold tax from bonuses at a flat 22% federal charge, in line with tax specialists.
As such, bonus tax withholding “will seem like an enormous quantity” for any taxpayer whose federal marginal earnings tax charge is lower than 22%, stated Jeremiah Barlow, head of wealth options at Mercer Advisors.
More from Personal Finance:
Here’s when you can visit a national park for free in 2024
3 year-end investment tax tips from top-ranked financial advisors
Annuity sales are on track for a record year. What to know before buying
Many taxpayers fall into that class. In 2023, that group includes single people with a taxable earnings as much as $44,725, and married {couples} who file a joint return with earnings as much as $89,450.
In 2020, 49% of particular person tax returns — roughly 81 million — had been in a marginal earnings tax bracket beneath 22%, in line with IRS statistics. (That determine contains taxpayers in the 10% and 12% tax brackets, however excludes these in the 0% bracket.)
Bonuses could have further tax withheld
A bonus could also be topic to different withholding, too, like state and native earnings taxes.
Employers in California, for instance, withhold supplemental wages at a ten.2% state charge — which means residents’ bonuses would doubtless be withheld at a mixed 32.2% state and federal charge, Barlow stated.
In addition, bonuses are additionally usually topic to Social Security and Medicare payroll taxes, of 6.2% and 1.45%, respectively.
“Very shortly somebody may discover themselves the place [roughly] 40% is withheld,” stated Matthew Fleming, a licensed monetary planner and senior wealth advisor at Vanguard.
Employers should additionally withhold a flat 37% from any bonus quantities that exceed $1 million.
Companies even have a second withholding choice: Instead of issuing a separate bonus check, they will lump a bonus in with your typical paycheck. Workers would pay tax at their regular income-tax charges.
You could get a few of that tax again
For these whose checks seem small, there is a silver lining: “Luckily, this implies you could possibly be due for a [tax] refund,” which might be equal to the additional quantity your employer withheld, wrote Fidelity Investments. You’d obtain any refund owed to you when submitting an annual tax return.
Of course, the reverse is also true: Higher earners — like these in the 24%, 32%, 35% or 37% federal income brackets — could wind up owing the IRS more cash at tax time if their bonus was withheld at a flat 22%, Barlow stated.
A big bonus — say, $200,000 — may simply push somebody into the 32% or 35% bracket, he added.
“Don’t assume that bonus quantity they took out was sufficient,” Barlow stated.