A bonus from your employer is always a good thing, however, you may want to estimate what you will actually take-home after federal withholding taxes, social security taxes and other deductions are taken out. Use this calculator to help determine your net take-home pay from a company bonus.
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Bonus Checks After Taxes
The arrival of December can leave you excited for not only the winter holidays but also the potential of a work bonus. While some employers will surprise you with one, others will let you know a few weeks in advance that you're receiving additional funds due to your performance. Unfortunately, the Internal Revenue Service (IRS) takes a portion of bonuses, which is why it's critical to learn how your bonus checks are taxed, as well as what you'll receive afterward — which you can do with a bonus check tax calculator.
Why Is My Bonus Considered a Supplemental Wage?
If you're receiving your first bonus, you're probably wondering why the IRS taxes them. The IRS views them as a supplemental wage, alongside back pay, overtime, severance pay and commission. While everyone would prefer if the IRS allowed bonuses to be tax-free, that's not the case. So, expect to pay taxes on them, but at a different rate than your regular income.
How Do the Percentage vs. Aggregate Method Differ?
The next question you probably have is about how your bonus checks are taxed. The answer? It depends, as the IRS uses one of two methods:
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- Percentage: In many cases, the IRS will use the percentage method because your employer will pay your bonus separate from your regular pay. With this tax method, the IRS taxes your bonus at a flat-rate of 25 percent, whether you receive $5000, $500 or $50 — however, if your bonus is more than $1 million, the tax rate is 39.6 percent. This percentage method may seem ideal as it tends to take less out of your bonus, which means more money for you initially, but be prepared to pay more when filing taxes the following year if you are in a higher tax bracket.
Bonus Checks After Taxes
The arrival of December can leave you excited for not only the winter holidays but also the potential of a work bonus. While some employers will surprise you with one, others will let you know a few weeks in advance that you're receiving additional funds due to your performance. Unfortunately, the Internal Revenue Service (IRS) takes a portion of bonuses, which is why it's critical to learn how your bonus checks are taxed, as well as what you'll receive afterward — which you can do with a bonus check tax calculator.
Why Is My Bonus Considered a Supplemental Wage?
If you're receiving your first bonus, you're probably wondering why the IRS taxes them. The IRS views them as a supplemental wage, alongside back pay, overtime, severance pay and commission. While everyone would prefer if the IRS allowed bonuses to be tax-free, that's not the case. So, expect to pay taxes on them, but at a different rate than your regular income.
How Do the Percentage vs. Aggregate Method Differ?
The next question you probably have is about how your bonus checks are taxed. The answer? It depends, as the IRS uses one of two methods:
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- Percentage: In many cases, the IRS will use the percentage method because your employer will pay your bonus separate from your regular pay. With this tax method, the IRS taxes your bonus at a flat-rate of 25 percent, whether you receive $5000, $500 or $50 — however, if your bonus is more than $1 million, the tax rate is 39.6 percent. This percentage method may seem ideal as it tends to take less out of your bonus, which means more money for you initially, but be prepared to pay more when filing taxes the following year if you are in a higher tax bracket.
- Aggregate: The other tax for supplemental wages is the aggregate method. If your employer tacks on your bonus to your regular paycheck, the IRS will use this method, which references the withholding tables to determine how much to take out of your wages. In most cases, you lose more of your bonus — compared to the percentage method — because of a higher tax obligation. Depending on the size of your bonus, you may even move up a tax bracket.
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Remember, calculate your taxes for your net pay bonus before you spend it. A lot of times, as demonstrated in 'National Lampoon's Christmas Vacation,' we'll think about what we want to buy and become committed to that purchase before we even receive our bonus, which may be far less than you imagined when taxes come into the picture. With our bonus check tax calculator, you can see your net bonus before you start planning your next purchase.
