I just got a year-end holiday bonus check and I’m grateful, but confused. The amount taken out for taxes seems way too high. It seems to be a greater percentage than my usual paycheck deductions. What’s up with that?
Oh, joy! Oh… wait! I hear this concern about bonus checks often. Uncle Scrooge… excuse me, Uncle Sam may be to blame. The IRS views bonuses (as well as commissions, overtime, even things like employer-paid moving expenses) as “supplemental wages.” Employers may use either a flat 25% withholding rate or an aggregate method. The aggregate method combines the bonus amount with the most recent regular wage paycheck. Then, the normal withholding amount based on IRS tables is determined for the total of both amounts. Your payroll department subtracts what was already withheld from your last paycheck and withholds the rest from the bonus amount.
The aggregate method, while more cumbersome, is actually the more accurate method of determining your actual tax liability. Pay now or pay later – April 15th, to be exact. (Not-so-fun fact: the average American works the first 111 days of the year – or to just past Tax Day – to pay their taxes.) The good news is that if the withholding at the higher rate was actually too much, you’ll be refunded when you file your tax returns.
Before you go out to spend your anticipated bonus, use the AmCheck Flat-Rate or Aggregate Bonus Calculator. Remember, in addition to the federal taxes, bonuses are also subject to withholding for Social Security, Medicare, and any state and local taxes.
Readers: Did you get a holiday or year-end bonus this year? What are your plans for the windfall?
Do you have a job-related question? Ask Anita.
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