Legally, bonuses are "supplemental wages" rather than regular salary. That makes the rules for withholding taxes different. If you feel withholding takes an unusually large bite of the bonus, you may not be wrong.
Supplemental wages include any pay outside your regular hourly, weekly or monthly earnings -- not only bonuses, but also commissions, overtime, severance pay, back pay and retroactive pay increases. With bonuses, the withholding depends, in part, on whether your employer gives you a separate check for the bonus income or lumps it in with your regular pay for the period. It also depends on whether your pay is more or less than $1 million a year.
If you earn more than $1 million for the year or your bonus pushes you over that mark, the withholding on your bonus is 35 percent, or whatever the current top rate is at the time you get paid. Below $1 million, if your bonus is combined with your regular pay, the employer uses regular withholding. If she separates out the bonus, she can withhold a flat 25 percent or calculate withholding as if the bonus were regular salary. If you pay state income taxes, the employer has to withhold that money on top of federal withholding.
You pay state income tax if you live or work in a taxing state. Withholding varies with state tax rates and rules: In New York, for example, your employer can withhold at your regular rate, or -- as of 2012 -- a special 9.77 percent rate for supplemental wages. Your bonus is also subject to Social Security and Medicare withholding. For most Americans, Social Security is a 6.2 percent tax and Medicare is 1.45 percent, as of 2012.
If withholding looks depressingly large, don't despair: It may not reflect your actual taxes. If your employer withholds 25 percent but your income stays in the 15 percent tax bracket, you get the extra 10 percent of the bonus back with your refund. If your bonus pushes you into a higher tax bracket than usual, however, any income in the higher bracket gets taxed at a higher rate than the rest of your pay.
- What Percentage of a Worker's Gross Income Is Withheld for Medicare?
- How to Estimate Federal Withholding
- How to Calculate Federal Taxes on Gross Pay
- How to Calculate a Salary After Taxes
- How to Draw a Paycheck from Your Own Company
- U.S. Tax Laws for Severance Pay
- How Much of a Salary Goes to Taxes?
- Can You Elect Not to Have Taxes Taken Out of Your Paycheck?