There are strategic moves you can make to minimize the impact of taxes on your bonus(Image credit: ariya j / Getty Images)A year-end bonus is a nice reward for your hard work — and a helpful infusion of cash, especially after holiday-related spending. But before you count on adding the full amount of your bonus to your bank account, it is important to note the impact of taxes.Otherwise, “you might be in for a surprise when your paycheck arrives, and you ask yourself, ‘Wait a minute — why are bonuses taxed so high?'” said NerdWallet. Even though “bonuses are considered earned income just like your salary or other work wages, which means they’re subject to ordinary income tax rates,” when it comes to “how taxes are withheld on your paycheck when you receive the bonus, it’s a different story.”How are bonuses taxed?”Bonuses are considered wages and are taxed the same way as other wages on your tax return,” said Intuit TurboTax — but when it comes to withholding rules, “the IRS doesn’t consider them regular wages.” Instead, your bonus counts as supplemental wages, meaning not part of your regular wages, and “can be subject to different federal withholding rules than your regular wages.”Subscribe to The WeekEscape your echo chamber. Get the facts behind the news, plus analysis from multiple perspectives.
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Sign up for The Week’s Free NewslettersFrom our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.Withholding is effectively your employer’s way of prepaying the taxes you’ll owe to the IRS, so you don’t have to do so later. There are two different ways that your employer may withhold federal taxes on your bonus:The percentage method: “When an employer taxes your bonus using the percentage method, it must identify the bonus as separate from your regular wages,” said Bankrate. The withholding rate for bonuses up to $1 million during the tax year is 22%, and it increases to 37% for any amount over $1 million.The aggregate method: “With the aggregate method, the tax withholding on your bonus is calculated at your regular income tax rate,” said Bankrate. This method often means “your initial tax withholding is higher,” but it’s necessary if your employer does not separate out your bonus amount from your regular wages, lumping them together into a single paycheck.Keep in mind that “in addition to federal withholding, you likely will need to have taxes withheld for Medicare and Social Security (also called FICA taxes), and your employer may withhold state taxes on the bonus as well,” said NerdWallet.Are all types of bonuses subject to taxes? While all forms of bonuses — performance, holiday, signing and profit-sharing — are subject to taxes, there are certain types of extra perks, such as fringe benefits, that may not be.”If you receive fringe
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