How my year-end bonus is taxed? This is the most common query among the employee sector in USA, now-a-days. Most likely, your income tax is withheld from your paycheck if you work as an employee. However, at the time when you get your bonus, much uncertainty might arise regarding how your bonus will be taxed this year. If you are still unsure about how bonus is taxed, what will be left after bonus tax, are bonuses taxed at 40%, how to avoid tax on bonus, what is the tax rate on bonus, do I get bonus tax back and much more, you can call Black Ink to get the best tax preparation service in USA. We take care of each single penny you earned with great hard work. We try to legally minimize taxation on your income. Try our other services and products and become an IRS-compliant citizen.

Important Things to Know About Bonus Taxes in USA:

Some of the essential points to know about how bonuses are taxed in United States are listed below:

·        Employee Bonus Is Taxable:

Just like ordinary wages and salary, employee bonuses are also taxable. Whether a bonus is received at the end of the year or in the middle, you will be deducted for the tax amount on that bonus. 1.45% for Medicare tax and 6.2% for Social Security tax must be withheld by the employer on the bonus. The same percentage is withheld from every paycheck of the employee. These amounts are then matched up by the employer and paid to the IRS directly by the employer on behalf of his employees. Not only this, Federal and state income tax is also withheld from the bonus. At the end of the year, the Form W-2 shows bonus amount along with additional taxable salaries and wages of the employee.

·        Methods to Withhold Income Tax:

There are two options for the employers to withhold income tax of employee. Wage statements and independent contractor forms still have a January 31 due date in USA.  Use any of the following two methods to determine how much income tax to withhold.

  1. Aggregate Method: If the bonus is added to one of the usual paychecks of the employees, then the income tax withholding is calculated. Take assistance to calculate your income tax withholding as per your salary and bonus with accuracy.
  2. Flat Percentage Method: For, income tax, employers are allowed by the IRS to withhold 22% from the bonus of each employee. It must be noted that this 22% is in addition to state income tax as well as the Social Security and Medicare taxes. For example, if the bonus amount is more than $1 million, then the initial $1 million has 22% tax withheld for Federal income tax deduction. If the employee receives anything more than $1 million, then 37% of that will be taxed. Furthermore, those employees who have income tax withheld from regular wages for the current or previous year can use this method.

·        Some Bonuses Are “Non-Taxable”:

Not all bonuses are taxable in USA. If the employees receive small and non-cash bonuses from their workplace, they do not need to report them as income. Therefore, employees are not required to pay taxes on such bonuses. The examples of nontaxable bonus are holiday events passes, tickets for sports or concert tickets etc that are non-cash. If the employer gives you cash at Christmas, it is a taxable bonus. It means that every gift is also not considered as non-taxable. Check our complete guide for gift taxes in USA.

·        Bonus Is Reported On Form W-2:

The employees are not required to report their bonus to the Internal Revenue Service as the form W2 reports their bonus. When the employees get their Form W-2 next January, their bonus is already included in their salaries and wages in Box 1.

·        Adjust Form W-4 For Less Taxed Bonus:

Before or after your bonus, you can adjust your form W4 with holdings. Ask your employers whether they use the aggregate method or the flat percentage method to have comparative income tax withheld from the bonus. If your employers are using the aggregate method, then consider to file a new Form W-4 soon before the bonus comes out. A lesser amount of tax is withheld from the bonus, if the withholding allowances are increased. Contrastingly, by decreasing the withholding allowances, the employer will withhold more taxes. Upon the basis of employees’ tax situation, the choice for the benefits is made. After the employee relieves his bonus, a new Form W-4 can be filed. The employee can increase withholding allowances by completing a new Form W-4 after determining that too much income tax is withheld on the bonus. In this way, more money can be received in each paycheck for the rest of the year instead of expecting it to come in the form of a tax refund.

·        How to Reduce Tax on Bonus:

You can easily keep more cash from your bonus with an expert tax planning. For example, by increasing the amount on 401(k) plan contributions, you can better use your bonus. IRS also increased 401(k) contributions and benefits limit in 2020. Contributions to other retirement accounts of employees can be increased for offsetting the additional tax applied on the bonus amount. Furthermore, the charitable contributions or other deductible expenditures of the employees can be increased by using a part of bonus cash. By making itemized deductions, the employees can easily decrease their total tax bill at the end of the year.

For any further help on paying taxes for your bonus to the IRS, partner Black Ink as your reliable outsource taxation and accounting company in USA.





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