Neighbours 2022 official teaser trailer We use your sign-up to provide content in ways you’ve consented to and to improve our understanding of you. This…
Working hard all year to help your company meet its annual goals deserves a reward, and you've definitely earned that bonus. But bonuses count toward your income for the year, so they're subject to income taxes. Read on to learn how much tax you can expect to pay on your bonus—and for tips on reducing your tax liability.
Federal and state taxes
While bonuses are subject to income taxes, they don't simply get added to your income and taxed at your top marginal tax rate. Instead, your bonus counts as supplemental income and is subject to federal withholding at a 22% flat rate.
Example: If you receive a $6,000 bonus for the year, you'll likely have $1,320 withheld in federal taxes to be sent to the IRS ($6,000 x .22 = $1,320).
Your bonus may also be subject to state taxes, although the withholding rate will vary depending on your state.
If you receive a very large bonus—over $1 million—some of it will be taxed at a higher rate. You'll have 22% federal tax withheld on the first million, then 37% on bonus funds above the first million.
Example: If you receive a $2 million bonus, you'd pay $590,000 in federal taxes on it
$1,000,000 x .22 = $220,000 tax on first million
$1,000,000 x .37 = $370,000 tax on second million
$220,000 + $370,000 = $590,000 total tax
Other Tax Liabilities
In some cases, you might have additional tax liabilities on the income from your bonus. For example, you will likely have to pay:
The 6.2% Social Security tax on any portion of your bonus that's below the $142,800 Social Security cap for tax year 2021.
The 1.45% Medicare tax.
Meeting your tax liabilities
When it comes to actually paying taxes on your bonus, your employer has two options: the percentage method or the aggregate method.
The percentage method is simplest—your employer issues your bonus and withholds taxes at the 22% flat rate—or the higher rate if your bonus is over $1 million.
The aggregate method is used when your employer issues your bonus with your regular salary payment and uses the total amount to calculate the amount of withholding. For example, if you normally withhold 35% of your pay for income taxes, the amount of withholding on your bonus would also be 35%.
Using the aggregate method doesn't mean that you actually have to pay more tax on your bonus. You'd likely qualify for a refund for withholding too much tax money. But it does mean that you could see less of the cash from your bonus upfront.
Use this bonus taxation calculator to figure out how much tax you'd pay on the amount of your bonus using either method, so you can know exactly how much money to expect.
Lowering your tax liabilities
While you can't avoid paying taxes on your bonus entirely, you can use your bonus funds wisely to reduce how much you'll owe at tax time. Use the funds to invest in your 401(k) or IRA to get a tax break.
And if you expect to take a pay cut in the next year—for example, if you're ready to retire—ask your employer to defer your bonus until the following tax year to lower your overall tax liability.
Remember, with TurboTax, we'll ask you simple questions about your life and help you fill out all the right tax forms. With TurboTax you can be confident your taxes are done right, from simple to complex tax returns, no matter what your situation.
For more tax tips in 5 minutes or less, subscribe to the Turbo Tips podcast on Apple Podcasts, Spotify and iHeartRadio
Brought to you by TurboTax.com
Source: Read Full Article