Receiving a bonus eases the burden of how to make ends meet, or for some, a great way to pad their wallet. For whatever reason, there’s still a concern on the question: how are bonuses taxed? Luckily, there is a bonus tax rate calculator for easy computing. But are there categories meant for bonuses in order for them to be taxed the way it is? Well, let’s finds out, shall we?
Understanding How Are Bonuses Taxed and Some Tips to Get a Certain Amount Back
Categorized as Supplemental Wages
In the eyes of the IRS, bonuses are defined as supplemental wages. This means it is considered an additional income on top of your regular wages. As far as taxes withheld at payout are concerned, bonuses are dealt like that of your salary income or ordinary wage, just like every other supplemental wage. This is not limited to vacation pay, moving expenses, dismissal pay, commissions and taxable fringe benefits.
Method Of Computation Used
Percentage Method
This is the most preferred method used by employers since it would be easier for them to uniformly tax the whole amount at a flat rate of 25%. If this will be so for you, your employer will issue two separate checks with one as your regular paycheck and the other as your bonus.
Aggregate Method
This is a much more complex way of withholding taxes for the employer since it takes a lot more time and requires a lot of effort to compute the amount. They take the withholding taxable amount out of the whole amount based on the IRS withholding table. Because of this, this means the IRS has taxed the employee more than the flat rate of 25%. If you received your bonus with your latest regular paycheck then this is the method used by your employer.
Options For Saving On Taxes
WaPo: One of Trump’s golf courses paid back more than $158,000 to Trump’s charitable foundation this year, reimbursing the charity for money that had been used to settle a lawsuit against the club, according to a new tax filing. https://t.co/7E7XIIoFUB
— Kyle Griffin (@kylegriffin1) November 21, 2017
You might actually be able to get a certain amount back as a tax refund, that depends on the income and the tax rate equivalent. If you have a huge sum then you can have considerable options to save on your taxes.
A few options to save on taxes:
- Increase retirement savings
- Donate to a charity
- Prepay mortgage or property taxes
You can talk to your employer about how you can decrease your taxable amount through gradually paid bonuses or defer payment of bonus to the following year.
There is no escaping from tax with your bonuses. But here are some tips on what you can write off from your taxable income to you can save money:
With the holidays fast approaching some people are expecting to receive their bonuses. Some might have already received them around the first part of the first quarter this year. It’s hard to just nod and go your way thinking that it is the way it is. Still, it pays to know how a large sum of your bonus is taxed and just how you can get some of it back. Legally, of course.
Do you have other tips on how you can reduce your taxable income (supplemental or not)? Please comment your thoughts below.
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