How Bonuses Are Taxed – TurboTax Tax Tips & Videos

overview Working hard all year to help your ship’s company meet its annual goals deserves a reward, and you ‘ve decidedly earned that bonus. But bonuses count toward your income for the class, so they ‘re discipline to income taxes. Read on to learn how much tax you can expect to pay on your bonus—and for tips on reducing your tax liability .

Woman counting cash and putting it in her purse

Federal and state taxes

While bonuses are subject to income taxes, they do n’t just get added to your income and taxed at your top borderline tax rate. rather, your bonus counts as supplementary income and is discipline to federal withholding at a 22 % bland pace.

Example: If you receive a $ 6,000 bonus for the year, you ‘ll likely have $ 1,320 withheld in federal taxes to be sent to the IRS ( $ 6,000 x .22 = $ 1,320 ) .
Your bonus may besides be subject to state taxes, although the withholding rate will vary depending on your state .
If you receive a very big bonus—over $ 1 million—some of it will be taxed at a higher rate. You ‘ll have 22 % federal tax withhold on the foremost million, then 37 % on bonus funds above the first gear million .
Example: If you receive a $ 2 million bonus, you ‘d pay $ 590,000 in federal taxes on it
$ 1,000,000 x .22 = $ 220,000 tax on first million
$ 1,000,000 x .37 = $ 370,000 tax on moment million
$ 220,000 + $ 370,000 = $ 590,000 full tax

Other Tax Liabilities

In some cases, you might have extra tax liabilities on the income from your bonus. For exemplar, you will likely have to pay :

  • The 6.2% Social Security tax on any portion of your bonus that’s below the $142,800 Social Security cap for tax year 2021.
  • The 1.45% Medicare tax.

Meeting your tax liabilities

When it comes to actually paying taxes on your bonus, your employer has two options : the percentage method acting or the sum method acting .
The percentage method is simplest—your employer issues your bonus and withholds taxes at the 22 % flat rate—or the higher rate if your bonus is over $ 1 million .
The aggregate method is used when your employer issues your bonus with your regular wage requital and uses the total come to calculate the measure of withholding tax. For exemplar, if you normally withhold 35 % of your give for income taxes, the measure of withholding on your bonus would besides be 35 % .
Using the aggregate method acting does n’t mean that you actually have to pay more tax on your bonus. You ‘d likely qualify for a refund for withholding excessively much tax money. But it does mean that you could see less of the cash from your bonus upfront .
Use this bonus tax income calculator to figure out how much tax you ‘d pay on the amount of your bonus using either method, so you can know precisely how much money to expect.

Lowering your tax liabilities

While you ca n’t avoid paying taxes on your bonus entirely, you can use your bonus funds wisely to reduce how much you ‘ll owe at tax prison term. Use the funds to invest in your 401 ( kilobyte ) or IRA to get a tax break .
And if you expect to take a give cut in the future year—for model, if you ‘re cook to retire—ask your employer to defer your bonus until the following tax class to lower your overall tax liability .
Remember, with TurboTax, we ‘ll ask you bare questions about your life and help you fill out all the right tax forms. With TurboTax you can be confident your taxes are done right, from simple to complex tax returns, no matter what your site .

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Category : Finance

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