If you were lucky enough to receive a bonus this year you may be wondering "How much will my bonus be taxed?" or "Why is the tax rate on my bonus so high?"The full information is found in Section 7 of IRS Publication 15, which discusses Supplemental Wages.
The short answer answer is that at bonus is taxed by one of three ways as follows:
1. If you make over $1,000,000 then there is a 35% federal tax imposed (but I'm guessing that you don't make over a million dollar bonus if you are reading this blog :-)
2. If you make less than $1,000,000 then you can be taxed at:
--a. A flat 25% or...
--b. Add the bonus dollar amount to the regular salary or wage amount for that period. Calculate the total tax due, then subtract the taxes already withheld from the salary or wages. The balance due is the amount to be withheld.
Don't forget the following additional bonus withholdings as well:
1. Social Security Taxes = 6.2% up to $106,800 of income (2009)
2. Medicare Taxes = 1.45% on all wages
3. FUTA (Federal Unemployment TAxes) = 6.2% up to $7,000 of income
4. State Taxes (lest we forget) = See your local state government website
The Bottom Line: Even though it may seem like you are paying higher taxes now, at the end of the year, your income tax liability is still run through the normal calculations.
If you want, you can change your w-4 so that less or more is withheld in each paycheck so that you are even at the end of the year. Here is a cool calculator that is related to the subject:
http://calculators.aol.com/tools/aol/paycheck04/tool.fcs
I'd be interested to know how much the withholding is for each state - please comment if you know - thanks!
Author's Note: This was a featured post on "Don't Mess With Taxes!" found here: http://dontmesswithtaxes.typepad.com/dont_mess_with_taxes/
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