Most employees welcome a year-end bonus, but many are confused about how this additional income is taxed. Many times the employee will be shocked at the large amount of Federal and State income taxes withheld from the bonus check. The fact is that in most cases, the employer is mandated to withhold taxes on bonus payments at rates higher than a typical paycheck.
It is also true that the additional compensation may push you into a higher tax bracket. However, when you move to a higher tax bracket, you don’t pay the higher income tax percentage on all of your income, just the part of your income that falls into the higher bracket.
So when that bonus check is handed to you, rejoice in the additional income, and if the withholding percentages seem way out of line, it is an incentive to file your income tax returns early to accelerate the timing of your refund.
Written by Patrick Wirth, CPA, CVA | Partner
Posted in Tax