Your employer might issue you a bonus check during specific times of the year. Sounds great, right? It can be, but taxes are handled differently depending on your specific situation. Know all the details so you can understand just how much of that bonus you will get to keep.
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Bonus checks are also known as supplemental wages. They are generally paid at the end of the year and at your employer's discretion. Most employers extend bonuses as a way of letting employees know they are valued and appreciated.
The most unfortunate thing about bonus checks is how they are taxed. There's a flat-rate of 25 per cent for federal taxes. And depending on the state in which you reside, there's also a flat rate for state withholding. Many try to skip around the 25 per cent rule but with little success. Sometimes you can increase the withholdings on your regular check before receiving the bonus. That will compensate for the high taxes deducted from your bonus check. You can readjust your taxes afterward. Another possible solution is to increase your withholding amount after you've received the bonus. This method will only work if you received your bonus before the end of the year.
There is also the aggregate method. Employees favour this more than the flat rate. Your bonus check is paid with your regular check, so it is calculated based on the withholdings associated with the regular check. Depending on the payroll software being used, the system might treat the bonus like regular earnings, which can place you in a higher tax bracket.
Some employers are generous enough to do what's called a "Gross-Up," where your bonus is issued as a separate check and your net pay matches the bonus amount. Meaning, no taxes are deducted. In this case, the employer pays all taxes, but the bonus amount is still added to your year-to-date earnings.
When calculating bonuses, be sure to follow all IRS and state guidelines. If you are confused as to how your bonus check will be taxed, there are several online resources to help you compute it. Or consult your payroll department. Those in payroll are trained to handle such questions. If they don't know the answer, they usually know where to find it.