So, Selena...
This year, my marketing team was surprised with New Year bonuses. While I am incredibly grateful, I was a bit shocked at the amount of tax that was withheld. Are bonuses taxed at a higher rate than regular pay?
- Janet M.
Hi Janet,
Congratulations on your bonus! It feels amazing when your hard work is recognized.
Now let's dive into your question. A bonus is considered a supplemental wage payment and is therefore subject to slightly different withholding guidelines under federal rules. The way it works in different states varies, so be sure to check the rules in your particular state.
Supplemental wages are generally any payments received in addition to your standard pay. Examples of supplemental wages include, but are not limited to:
- Commission
- Overtime pay
- Payments for accumulated sick leave
- Severance pay
- Awards
- Prizes
- Back pay
- Retroactive pay increases
- Payments for nondeductible moving expenses.
- Taxable fringe benefits
- Expense allowances paid under a nonaccountable plan
Taxes from your regular wages are withheld based on Form W-4 information, such as your marital status and allowances. The amount of taxes withheld from supplemental pay depends on how the wages are paid.
If the supplemental wages were added onto your regular paycheck, the wages would be combined and taxed at the normal rate. For example, if your paycheck was $3,000 and you received a bonus of $1,000, the withholding rate would be applied to the $4,000 total.
Supplemental wages paid separately are taxed at a fixed rate of 25%. For example, if you received your standard pay of $3,000 in a separate check from the $1,000 bonus, your regular wages would be taxed based on your W-4, and the bonus at 25%. Keep in mind that you can request payroll or HR to withhold at a higher rate than 25% if you feel that due to your income you would be under-withheld. For example, if you realize that a bonus you received during the year will put you in the 35% marginal tax rate − that 25% withholding will not be enough.
For bonuses exceeding $1 million, 39.6% of the amount above $1 million is withheld in addition to the standard 25% of the amount below $1 million.
So, to summarize: yes, bonus checks can be, and often are, taxed at a higher rate than you're used to seeing.