So you worked your tail off and now your boss is giving you a big ol' bonus. WOOHOO! 🥳 Don't spend it all in one place, OK? And don't buy any pink Stanley cups on the black market. 🏆 You're better than that.
While the extra coin is definitely something to celebrate, don't forget Uncle Sam wants a piece of that pie. How rude. 😒🥧
Here’s Five Fast Facts on bonuses and taxes:
- 💰 Save Some for Me - Although it's outside your regular paycheck, the IRS still considers bonus money a part of your taxable income. This means you'll have to report it on your income taxes.
- 🍕 Free Pizza Party - There are some exceptions to the rule. If your boss treats you to a meal or gives you a small gift (like a mug or a pen), you don't have to report that on your tax return. Other things that don't count: company parties and employee discounts. However, there is a chance that company gift cards over a certain amount get taxed and show up on your paycheck.
- 🧮 Withhold Me Closer - Your bonus is taxed at a different withholding rate than your paycheck. In general, the federal income tax rate for bonuses comes out to around 22%, but there are two different methods employers use to calculate it.
- 🤓 Choose Your Fighter - The first and most common method is the percentage method - it's the most straightforward. It's a flat rate method that requires your employer to withhold 22% of your bonus, plus an extra 7.65% for Medicare tax and Social Security taxes. The second is the aggregate method, which is less common. In the aggregate method, your employer will put your bonus into one paycheck for a payroll period. Then, they'll pay tax according to your normal withholding rate, plus Social Security and Medicare.
- 💸 For My Next Trick - Sometimes, a bonus can knock you into the next tax bracket. If you're expecting a big payout, increase your withholding amount on your W4 as soon as possible. To offset the tax burden of your bonus, you can also sock it away in a tax-advantaged account, like an eligible 401(k), IRA, or HSA (Health Savings Account). Just make sure you're not going over the yearly maximum contribution.
🔥Bottom line: Looking for more ways to reduce your taxable income? Consider donating to your favorite charity. Don't forget to claim all those tax credits you're eligible for, too! Wondering how taxes work for your student loans? We've got an article for that.
Expecting a bonus in your next paycheck?
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