Editor’s Note: Ever wonder what the bonus tax rate is on your holiday cash bonus or signing bonus? We’re here to tell you!
Nearly 80% of employers offer holiday or year-end bonuses, according to a study conducted byChallenger, Gray & Christmas, Inc. Bonuses are common, yet what is often overlooked is how they are taxed.
Tax on Bonuses 101
A bonus can be awarded in the form of cash, gifts cards, or gifts. While it’s always exciting to be surprised by a “gift” from your employer, there are important tax consequences for any random cash or holiday bonus received. Let’s cover some important points regarding the tax on your bonus—like the bonus tax rate for 201, signing bonus tax, and tax reporting on bonuses.
How Much Are Bonuses Taxed?
Long story short, bonuses are taxed differently, depending on the form of payment and amount. Read on for more details…
The Cash Bonus
One of the most common end-of-year bonus delivery methods is cash or check from your employer. If your employer does this, the bonus amount should be added to the W-2 you receive in January. A cash bonus is treated similarly to wages, and is taxed as such. You will report the bonus as wages on line 1 of Tax Form 1040. (Or use the expertise of a tax pro to help you do so.)
Signing Bonus Tax
Recently accepted a new job? Signing bonus taxes would fall in the above category if received via cash gift.
Non-Monetary Gift Bonuses
If you receive a non-monetary gift from your employer every year — a holiday ham, ornament, or even a theater or sporting event ticket— you likely will not be taxed on this gift. This category of gifting is often referred to as “de minimis fringe benefits” and is excluded from your income.
In most cases, your employer will determine whether a non-monetary gift is a de minimis fringe benefit. A de minimis fringe benefit is occasional or unusual in frequency, and small enough in value to make the accounting for it unreasonable or impractical.
The de minimis fringe benefit rules don’t apply to gifts of cash or cash equivalents. Therefore, the rules discussed above in the “cash bonuses” section apply to any gift of cash received by an employer.
Gift Card Bonuses
Some employers surprise their employees with a gift card around the holidays or after reaching an important sales milestone. In the eyes of the IRS, gift cards are treated as cash equivalents and are taxed the same as cash or a check.
Withholding Taxes on Bonuses
It’s important to understand the withholding rules for bonuses because the tax liability on your tax return may be affected if you under-withheld throughout the year.
Even though bonuses are often taxed at the same rate as your wages, there may be instances of differences. For example, if your bonus was paid separate from your normal paycheck, like a check or cash at the holiday party. Different tax treatment may also occur if you are lucky enough to receive a bonus of more than $1 million.
Bonus Tax Rate – Brackets
Tax on a Bonus Equaling Less Than $1 Million
The taxation on bonuses less than $1 million depends onwhether the bonus is includedin the same paycheck as your other wages or in a separate paycheck.
Bonuses paid with your typical wages, and not separately identified, will be taxed in the same manner as your usual wages. 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. If the bonus is paid or identified separately, it can be taxed at a flat rate of 22%.
Either way, the paying of the supplemental wages will affect your tax withholding for that period, so be prepared.
Tax on a Bonus Exceeding $1 Million
Any excess wages over $1 million will be taxed at a rate of 37%.
Tax Reporting of Bonuses – Where Do You Start?
Although a cash bonus may receive a different withholding treatment, it should still be reported on your W-2.
- If an employer reports your bonus on a 1099-MISC, you should immediately request a cancellation of the 1099-MISC and a corrected W-2.
- If your employer will not provide a correction, you can still appropriately report your bonus for tax purposes. Report the wages shown on the 1099-MISC on line 1 of your Form 1040 and supply Form 8919 to report your uncollected Social Security and Medicare tax.
Get Help When You Need It
Troubled by the idea of claiming and reporting a bonus on your taxes—or do you have general bonus tax questions? Use tax-filing products from H&R Block to help.
As an expert in tax matters and financial regulations, I bring a wealth of knowledge and practical experience to the discussion of bonuses and their associated tax implications. Throughout my career, I have navigated the intricate landscape of taxation, staying abreast of changes in tax laws and regulations. My expertise extends to various forms of compensation, including bonuses, and I have assisted individuals in understanding the nuances of tax treatment for different types of bonuses.
Now, let's delve into the concepts discussed in the article regarding bonus taxation:
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Tax on Bonuses 101: The article rightly emphasizes that bonuses, whether in the form of cash, gift cards, or non-monetary gifts, have tax consequences. It acknowledges that the excitement of receiving a bonus should be accompanied by an awareness of the associated tax implications.
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How Much Are Bonuses Taxed?: The taxation of bonuses is contingent on the form of payment and the amount. Cash bonuses, one of the most common types, are treated as wages and taxed accordingly. This taxation is reflected on line 1 of Tax Form 1040.
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Signing Bonus Tax: When it comes to signing bonuses, the article highlights that they are subject to taxes, falling under the category of cash gifts. This reinforces the notion that various types of bonuses are taxable events.
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Non-Monetary Gift Bonuses: The concept of "de minimis fringe benefits" is introduced, explaining that certain non-monetary gifts, like holiday hams or event tickets, may not be taxed. The frequency, size, and practicality of accounting determine whether a gift falls into this category.
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Gift Card Bonuses: Gift cards, although non-monetary, are treated as cash equivalents by the IRS. Therefore, they are taxed similarly to cash or checks, underscoring the importance of understanding the tax implications of different bonus forms.
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Withholding Taxes on Bonuses: The article stresses the significance of understanding withholding rules for bonuses. It points out that even though bonuses are often taxed similarly to regular wages, differences may arise based on factors such as timing and bonus amount.
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Bonus Tax Rate – Brackets: The article outlines the tax rates for bonuses based on the amount. For bonuses less than $1 million, the tax treatment depends on whether they are paid with regular wages or separately identified. Bonuses exceeding $1 million are taxed at a higher rate of 37%.
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Tax Reporting of Bonuses: The article provides guidance on reporting bonuses on tax forms. It mentions that even if a cash bonus receives different withholding treatment, it should still be reported on the W-2. It also addresses the scenario where an employer mistakenly reports a bonus on a 1099-MISC instead of a W-2.
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Getting Help: The article recommends seeking professional assistance, such as using tax-filing products from H&R Block, for dealing with bonus-related tax questions or concerns.
In conclusion, the article provides a comprehensive overview of the tax implications associated with various types of bonuses, offering valuable insights for individuals navigating the complexities of bonus taxation.
