A large part of a persons compensation my come from a quarterly or end of year bonus. The general rule is that bonuses are taxed at the same rate as ordinary income.
How are bonuses taxed by IRS?
Your your bonus check probably gets withheld at a higher rate, that check won’t be taxed differently than your other checks. There is no difference in taxes paid between someone who makes $200k/year and someone who makes $100k/year with a $100k bonus. The reason your check is withheld differently is because of the way your employer calculated how much to withhold. Employers have several options on how to withhold taxes on the bonus that they pay. Your bonus is either withheld at a flat 25% or is withheld from the table using an income of your normal monthly pay plus your bonus.
Do people pay more money on taxes on bonuses?
The short thing to understand is, withholding will probably more than you’re used to, but any overpayment will be refunded at return time. This concept between withholding and taxing leads to lots of confusion over bonuses and mistakenly leads to the mis conception that bonuses are taxed at a rate differently than other types of income a taxpayer receives.
Tax Withholdings on Bonus Income
The income tax portion of a bonus is only part of the equation and all other withholdings will be taken out from bonuses that are paid. If your employer used the aggregate method, your withholding will most likely be even higher! However, if your effective tax rate is below 25% (or the federal tax bracket used with the aggregate method), then you will see some of this money back when you file your return.
A bonus or raise to the next tax bracket almost never nets you less money.
The fact is, only the extra money that puts your over the bracket line will get taxed at the higher rate. If you are single and make $87,800. This puts you in the 25% tax bracket, and only $50 away from the next tax bracket. Then you get a bonus of $100. $50 of your bonus will get taxed at 25%, and $50 will be taxed at 28%. The rest of your $87,800 is still taxed the same way as it would have been had you not gotten your bonus. The only way declining the bonus would be beneficial is – oh wait there is no way.