You had a great year at work, so you were grateful to hear you were getting a bonus. While a lump sum of anything sounds terrific, a considerable chunk of it could be taken by the state. Bonus payments, which fall under supplemental wages in business terms, are always taxable if your state levies a tax.
State income tax isn't an issue if you live in Alaska, New Hampshire, Tennessee, Florida, South Dakota, Washington, Nevada, Texas or Wyoming. Since they don't have state taxes anyway, they won't mess with your bonus; but someone else will. Even these states can't say no to the federal government, so the Internal Revenue Service will take its usual bite from your bonus.
State income tax laws vary by state, so the only way to calculate a bonus tax properly is through your state revenue agency's requirements. Your state may use an aggregate calculation method. This means your employer adds the bonus to your regular wages and deducts state income tax as though it were a normal part of your pay. For example, in Minnesota, the employer uses the W-4 or W-4MN form and state withholding tax tables to figure regular withholding.
If your bonus is paid separately from your regular wages, your employer may withhold at a flat percentage. In Minnesota, as of 2012, the employer multiplies the bonus amount by 6.25 percent. Georgia bases its taxes on the bonus amount. If it's under $8,000, Georgia wants 2 percent. The tax percentage goes up incrementally, but it's capped at 6 percent for bonuses of $15,000 or more. In California, the employer takes a flat amount of 10.23 percent, regardless of the bonus amount.
Employer Pays Taxes
If your employer is gracious enough, she may absorb the tax costs for you in a "gross-up." That means the total bonus amount was included in your gross wages for the year. It turns up as taxable wages on your annual W-2 form but doesn't incite federal or state taxes.
- IRS.gov: States Without a State Income Tax
- Macelester College: W-4MN Form
- Minnesota Department of Revenue: Withholding on Supplemental Payments
- Georgia Department of Revenue: Employer's Tax Guide
- California Employment Development Department: Rates, Withholding Schedules, and Meals and Lodging Values
- Ceridian: Gross-Up Formula