Employers take taxes from your check in one of two ways:. The percentage method. This is the method your employer will use if, like I did, you receive your bonus money in a check separate from your paycheck. The aggregate method.
This is the method your employer will use if your bonus is added on to a regular paycheck. Your employer will withhold tax from your bonus plus your regular earnings according to what you shared with your employer on your W Because you're receiving more money than usual, your employer will withhold more money than usual. In fact, the IRS provides a handy calculator that figures out the tax withholding on your income, so you can brace yourself ahead of time.
Greene-Lewis says that in some cases, depending on your income and tax rate, you might actually get some of this money back in the form of a tax refund. If your bonus is only a few hundred bucks, there isn't much you can do about the taxes. If you'll receive a considerable amount of cash, though, you have a few options. But this compensation does not influence the information we publish, or the reviews that you see on this site.
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Your bonus is considered "supplemental income" by the IRS, and treated differently at tax time. Taxes will be withheld from your bonus according to the percentage method or the aggregate method. You may be able to offset some of the taxes with deductions. The U. Each rate is tied to a range of income referred to as a tax bracket.
The system is progressive, meaning your income could fall into more than one tax bracket and be subject to more than one rate. It is possible for a bonus to bump your income into the next tax bracket — and increase your marginal tax rate. The more income you have, the more your tax liability may increase. One way to help reduce the risk of facing a tax bill when you file is to review your W-4 withholdings.
Understanding how bonuses are taxed can help you be prepared when filing your income taxes. She has more than a dozen years of experience in tax, accounting and business operations. Christina founded her own accounting consultancy and managed it for more than six years. She co-developed an online DIY tax-preparation product, serving as chief operating officer for seven years.
You can find her on LinkedIn.
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