Is the money that you receive from your bonus free money, or are you subject to tax obligations? How much is your bonus taxed, and is there a way to lower the rate? If you just received a bonus at work, or you know you have one on the way, you probably have a million questions running through your head. The professionals at A. Roberts & Associates are here to address some of the most frequently asked questions about how annual taxes and bonuses work so you can know what to expect!
When Do I Pay Taxes On My Bonus?
Bonuses do get taxed, but the amount is typically withheld by your employer. Just like your regular wages, the amount you owe (or the amount you’ll be refunded) is calculated from your tax liability and the amount that was withheld from your paycheck. The easiest way to think about it is that your bonus will be taxed in the same manner as your regular earnings.
How Much Does My Employer Withhold From My Bonus?
The exact amount that your employer will withhold from your bonus can be done in a number of ways. The flat rate for standard withholding is 22%, but if your regular wages go by any other percentage, then there’s a chance that your bonus will be matched to that same percentage.
Is It Possible To Reduce The Amount That’s Taxed On My Bonus?
There are a few effective ways to minimize the amount of taxes you owe from your bonus come tax season, and our recommendation is to put that extra money towards a dedicated savings account. If you already have a 401(K) or IRA, then making a sizable contribution can benefit you greatly. Contributions to an HSA can also help reduce the taxes you owe.
Learn more > Can I Reduce My Taxable Income With A 401(K)?
Are Bonuses Counted Separately Or Along With My Usual Wages?
The methods for withholding and taxing your bonus may be similar to how your regular wages are handled, but the two are technically counted separately. That’s because bonuses are considered “supplemental” wages and may be upheld to certain federal or state rules. You can always ask a trusted tax advisor to break it all down for you to get a better understanding of your own earnings.
Will My Bonus Count Under Any Other Tax Liabilities?
When calculating how much to withhold from your bonus, your employer will also factor in any other tax liabilities you may have like Social Security and Medicare taxes. A good rule of thumb to go by is that any tax deductions that you normally see on your average paycheck will likely apply to your bonus as well.
What Types Of Bonuses Aren’t Taxed?
Not all bonuses come in paychecks. Your employer may gift other items like tickets to a show, booked hotel rooms at travel destinations, and the like. These are what’s referred to as “fringe benefits”, and they are not always subject to taxes since these are not explicitly categorized as monetary. However, there may be some fringe benefits that can still be taxed. Before assuming that you’re in the clear, be sure to run it by your reliable financial advisor first.
Have More Questions? Consult The Experts At A. Roberts & Associates!
Navigating your taxes effectively is key to enjoying a relaxing retirement, and that includes knowing how to handle bonuses. Contact A. Roberts & Associates today to ask about our retirement planning and tax planning services before scheduling a consultation.