Imagine going home and telling the family, "I got a bonus!" Wow! The joy it would bring to many, especially those that really needed the financial boost. It happens to many of us every year. It's a great feeling and I commend the companies that share the profits with their employees.
Generally, it's a good feeling to get a bonus from work. It's a lump-sum amount that could help mitigate the financial burden, stress, and demands associated with the holidays. Fun-loving individuals will buy gifts, plan vacations, or simply absorb the cost of a huge family dinner. Receiving ‘extra money’ is a blessing. There are those that will tell you ‘extra money’ can be a curse, but I bet you – if you offered to relieve them of the ‘curse’ by telling them to give you the money, they would probably reject that offer. However, there is one 'catch' of getting a huge bonus: bonus tax!
Bonus - Supplemental Wages
Your bonus income is considered supplemental wages by the IRS. Here’s the scoop as outlined by our friends at the Service:
Supplemental Wages Identified Separately from Regular Wages.
If you pay supplemental wages separately (or combine them in a single payment and specify the amount of each), the federal income tax withholding method depends partly on whether you withhold income tax from your employee's regular wages. If you withheld income tax from an employee's regular wages in the current or immediately preceding calendar year, you can use one of the following methods/options for the supplemental wages.
If the supplemental wages are paid concurrently with regular wages, add the supplemental wages to the concurrently paid regular wages. If there are no concurrently paid regular wages, add the supplemental wages to, alternatively, either the regular wages paid or to be paid for the current payroll period or the regular wages paid for the preceding payroll period. Figure the income tax withholding as if the total of the regular wages and supplemental wages is a single payment. Subtract the tax withheld from the regular wages. Withhold the remaining tax from the supplemental wages. If there were other payments of supplemental wages paid during the payroll period made before the current payment of supplemental wages, aggregate all the payments of supplemental wages paid during the payroll period with the regular wages paid during the payroll period, calculate the tax on the total, subtract the tax already withheld from the regular wages and the previous supplemental wage payments, and withhold the remaining tax.
This method can be cumbersome and time-consuming. Needless to say, it’s the least favorite method amongst employers.
Withhold a flat 25%!
Easy, right? Sure it is! This is why most employers prefer this method.
Supplemental Wages Exceeding $1 Million During The Calendar Year – Special Rules Apply
If a supplemental wage payment, together with other supplemental wage payments made to the employee during the calendar year, exceeds $1 million, the excess is subject to withholding at 39.6% (or the highest rate of income tax for the year). Withhold using the 39.6% rate without regard to the employee's Form W-4. In determining supplemental wages paid to the employee during the year, include payments from all businesses under common control.
Note, however, “regardless of the method you use to withhold income tax on supplemental wages, they’re subject to social security, Medicare, and FUTA taxes.” (IRS).
If you're one of the many that will receive a bonus this year, spend/invest wisely. And remember, Tax Largie, Inc. is always available to help.