Congratulations on getting that bonus. It’s nice your employer recognized your hard work and effort, but before you spend that money, you may want to consider how much tax you’ll have to pay.
Here’s what you should know about how your bonus will be taxed.
How much are bonuses taxed?
Bonus payments are ordinary income, which means they’re taxed at the same rates as your salary or distributions from a retirement plan. By themselves, they don’t receive any preferential treatment.
Often, when people ask how much tax they’ll pay on a lump sum or bonus, what they’re really asking is how much tax will be withheld from that payment. The IRS has a few rules that must be followed depending on whether your bonus is paid separately or combined with a paycheck, and how large the payment is.
If you get your bonus by itself, and it’s $1 million or less, the employer will hold back a flat 22% federal tax, plus your payroll tax and Medicare. Currently, those rates are 6.2% and 1.45%. Any amount over $1 million has a flat rate of 37% and the 1.45% Medicare tax.
The amount of FICA tax that may be deducted is subject to how much you’ve earned year-to-date, including the bonus. In 2019, the maximum earnings subject to FICA are $132,900, and any amount above that is exempt. The Medicare tax has no limit. If you’re single, and your income is more than $200,000, your employer must withhold an additional 0.9% for Medicare. If you’re married filing jointly, the threshold is $250,000. Sometimes, the employer isn’t aware of your tax-filing status, and you may have to correct the amount when you file your tax return.
Example calculations of how bonuses are taxed
You receive a bonus of $100,000. You’ll have $22,000 withheld for federal tax, $6,200 for FICA and $1,450 for Medicare. You’ll take home $70,350 of your bonus.
You receive a bonus of $1 million. You’ll have $220,000 withheld for federal tax, $8,240 withheld for FICA, $14,500 withheld for Medicare and another $7,200 held back for the surplus Medicare tax. Of your initial $1 million bonus, you’ll take home $750,060.
Additional information on how bonuses are taxed
If your bonus is part of a regular paycheck, the amount withheld will be at the payroll rates, which may be higher due to the larger amount of income. This will happen because they’ll add the bonus amount to your regular salary and treat the combined amount as a normal payroll.
For example, if your usual monthly salary was $5,000, the amount of withholding would be based on income of $60,000. If you add a bonus of $10,000 to your monthly salary, they’d multiply $15,000 by 12 months and withhold based on the much higher income of $180,000.
If you live in a state that imposes its own taxes, your employer may have to withhold that state percentage as well.
You should always keep in mind that tax withholdings are done using tables, and the amount of tax you owe is based on your individual tax return. If you receive a large bonus or have had a change in your life circumstances, you may wish to consult with a qualified tax professional to receive advice tailored to your situation. The goal is to avoid penalties for not having paid enough of your liability before December 31.
The IRS Publication 15 contains useful information for those who want the nitty-gritty of employer taxes and how they may interact with your annual bonus.
Source: US News
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