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. In most cases, a bonus is paid and identified separately from your regular wage by your employer — and in that case, your employer can use a couple of different methods to calculate the tax withholding. We are now one month into the deferral period, and many questions are still circulating. 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. You must withhold federal, state, and local income tax as well as FICA tax from each employee’s supplemental wages. Your bonus amount simply becomes part of your total taxable income for the year, which may impact your tax bracket, i.e. According to the IRS, that bonus of yours is “supplemental income,” a category that also covers commissions, overtime pay, prizes, retroactive pay increases and more. Use the funds to invest in your 401(k) or IRA to get a tax break. In some cases, you might have additional tax liabilities on the income from your bonus. The satisfaction of receiving a year-end bonus may soon be tempered by the realization that income taxes will have to be paid on the extra money. Military pay is subject to federal tax in ways that are defined by federal law. A bonus is always a welcome bump in pay, but it’s taxed differently from regular income. 110,577 views. That means you could earn some of your bonus back in the form of a refund if your tax return shows too much was withheld for your total taxable income level, after accounting for deductions and credits. Ouch. You will have $22,000 withheld for federal tax, $6,200 for FICA … the percentage of tax you pay on your income. You'd likely qualify for a refund for withholding too much tax money. 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. Although it can be frustrating to see part of that check disappear into the ether, focus on the positive: the sudden cash infusion! You'll have 22% federal tax withheld on the first million, then 37% on bonus funds above the first million. Keep in mind that if your employer doesn’t specify that the extra cash is a bonus and just lumps it all in with your regular pay, it’ll be taxed at the same rate your regular paycheck would be, without any fancy mathematical acrobatics. In this case, the bonus received would be taxed in the financial year 2019-20 and not in 2018-19 even though the bonus was declared in 2018-19. Here are two examples of how bonuses are taxed: You receive a bonus of $100,000. Option 2: If your bonus is added into a regular paycheck, your employer can use the aggregate method, which is a little more complicated. Supplemental income is subject to a slightly more convoluted withholding pattern than your regular wages, depending on how much of a bonus you earn and the way in which your boss disperses it. Say that amount was $300, and you normally see $50 of your $1,000 check withheld. And although the bonus is subject to specific tax rules when it’s paid, when Tax Day comes, it’s treated just like any other kind of income. However, by combining the two for that tax period, your tax withholding percentage for that period may increase as if that was the amount you would be paid each paycheck for the remainder of the year. 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