How Are Bonuses Taxed? Here Are the IRS Rules for Your Windfall

There’s nothing like a bonus to make you feel better about your job. Whether it’s the year-end check that makes holiday shopping a little less stressful or just a reward for your great performance, a bonus is always a welcome windfall.

Of course, when you earn money, you almost always have to save some of it for Uncle Sam. So how are bonuses taxed, exactly?

How Bonuses Are Taxed

Here’s what the IRS says about how it determines classifications of bonuses and how taxes play a part.

First, What Qualifies as a Bonus?

According to the IRS, that bonus of yours is considered “supplemental income,” a category that also covers commissions, overtime pay, prizes, retroactive pay increases, and more.

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.

How Normal Bonuses Are Taxed

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.

Option 1: A flat 22% of your bonus is withheld. Pretty simple — and nice, if you earn enough money to put you in a higher income bracket overall. (Not so nice if you’re in the 10% or 12% brackets, though. )

Option 2: If your bonus is added into a regular paycheck, your employer can use the aggregate method, which is more complicated. Basically, the withholding for the total check amount is calculated as it normally would be per your income bracket and W-4 information, and then your employer subtracts the amount that would be withheld on a regular paycheck.

For instance, if you get a check for $4,000 — a $3,000 bonus on top of your normal $1,000 wages — your employer would calculate the amount you’d be taxed for $4,000 in regular wages. Say that amount was $300, and you normally see $50 of your $1,000 check withheld. In…