How are bonuses taxed? Why is withheld amount not same as final amount?

Question

I have not found any clarity looking at a lot of search engine results and articles.

Most articles state that there are 2 possibilities, that taxes from bonuses can be withheld at a flat 25% rate, or that it can be withheld based on income based on withholding tables, which are dependent on marginal tax brackets, and that the choice is dependent on the employer.

However, I have gathered from an answer on stackexchange that if withheld at the monthly income tax rate, the amount is refigured when one files her taxes, and so it is taxed based on ordinary income tax rates.

Is it the same for the flat 25% withholding, or is this amount considered to be the final taxes, which is not adjusted at tax time?

In other words are all bonuses just taxed at ordinary income tax rates?

Answer 1

In the US, withholding has nothing to do with your actual tax liability. You control the amounts withheld via form W4 that you provide to your employer. It is up to you what to write in that form, and how much is withheld will be based on that. You may limit the withholding and have nothing withheld at all, or withhold twice as much as your real tax liability is and get a refund next year.

Bonuses are irregular payments, and as such employers are not required to follow W4 for them. Instead they can choose flat rate withholding (25% for most). That simplifies the withholding calculation significantly, so most employers do that. Again - has nothing to do with your actual tax liability.

At the end of the year, you file your annual tax return on which you write down all your income, deductions, and calculate your tax liability. You then credit the amounts withheld to your tax liability. If the withholding doesn't cover the liability - you send a check to the IRS. If the withholding is more than the liability - you get a refund from the IRS. For this calculation - bonuses are part of your salary and are reported on W2 as salary income.

Answer 2

Not sure what state/country you are in, but my bonus is taxed just like regular wages.

The only difference I see is an extra line-item in my earnings / wages area of my pay stub.

It seems that the combined sub-total is what they used to calculate my tax withholding for that period, and the next period (without bonus) my check look "normal" again. It definitely bumped me into a 'higher' tax bracket for that period.

So to answer your question, I'd say they are taxed like regular wages, based off the withholding tables published by the IRS, your State and or your payroll providers software (quickbooks/peachtree for some companies, ADP or in-house team for larger).

Answer 3

Bonuses in the U.S. are taxed as normal salary/wage income. They are part of the total taxable income reported to you on Form W-2 and you include them with your normal income on your 1040/1040A/1040EZ.

As with normal income, the rate at which they withhold from a bonus has nothing whatsoever to do with how much tax you will actually owe on the bonus. You could, for instance, donate the entire bonus to charity, deduct its entire value, and not owe any taxes on it, resulting in a refund for the entire withholding amount. Conversely, they could withhold 25% from your bonus and you could end up paying 30% or more on it if you ended up in a higher tax bracket for any reason, resulting in you owing more than what was withheld.

Answer 4

The employment tax circulars state that bonuses should be taxed at 25% with regard to proper withholding by the employer. Some paycheck software may not take this rule into account, as above. See IRS.gov Circular E. For the employee, the total income (including bonuses paid) is declared at year-end, and the tax rate is applied from the tax tables, which may leave one under or overpaid depending on the rest of the return data.