Do You Know How Annual Bonuses Are Taxed?

Do You Know How Annual Bonuses Are Taxed?

No one can deny that they love receiving their annual bonuses. However, not all of them really understand how these annual bonuses are associated with tax deductions, tax returns or even what is considered as a bonus by the Internal Revenue Service (IRS for short).

Sometimes, employees who are receiving their annual bonus from their employers may be surprised when they realize how small the bonus becomes after taxation. They may even wonder if their employers have calculated the withholding tax accurately. Below are some of the common questions that pertain to how annual bonuses are taxed.

What Constitutes a Taxable Bonus?

According to IRS, a bonus is a type of payment made from an employer to an employee that is supplementary of a standard compensation. It can be non-cash or cash. Also, a holiday bonus is liable for tax, even if it is presented as a gift. However, you do not have to claim small non-cash holiday gifts like a corporate mug as a bonus.

How Do You Avert Over-Withholding From Your Bonus The Following Year?

One of the easiest ways to have less tax withheld from your regular pay and personal bonus is to claim extra withholding allowances with a Form W-4. You can get a new form from the IRS website or request for one from your payroll department. Do note that you can claim as many allowances as you need to, to have the right amount withheld from your paycheck.

Also, you are not limited to the amount you have calculated on the IRS worksheet and number of dependents you have. Remember to check with your payroll department how long it will take for a Form W-4 to take effect. You should not send the form to IRS.

You Realized That Your Employer Withheld More Tax Than Necessary. What Can You Do?

If it is certain that your employer calculated the bonus that’s to be withheld correctly, you will not be able to get the withheld tax back until next year’s tax return has been filed. A simple way to even out the amount you have withheld is to file a new Form W-4. By adjusting your withholding, you will be able to reduce the amount of withheld tax from your pay for the remainder of the year. If you need to make adjustments again, you will need to file another Form W-4.

Did Your Employer Make a Mistake?

Mistakes do happen. If your payroll department is in charge of calculating the withholding tax without the help of software, they may inadvertently look at the wrong form or read the incorrect column. That being said, even companies that utilize payroll software can make mistakes too which is why training in the initial phase is imperative. Although most withholding tax on bonuses are calculated according to the rules set by IRS, it is pertinent to talk your respective department when you have doubts.

Are Your Bonuses Subjected to Payroll Taxes?

Yes they are, and you and your employer are expected to pay payroll taxes on bonuses, just like how it’s done with regular paychecks.