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Lev, Tax Advisor
Category: Tax
Satisfied Customers: 29558
Experience:  Taxes, Immigration, Labor Relations
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How to pay less taxes on bonus?

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Any tricks to get less tax on a bonus? I'm supposed to give someone that works for me a bonus, but I heard that there's special taxes to the recipient of bonuses? Higher taxes. Is that true, and if so, there any way to avoid this? (Like higher salary for a month?)

There is no "magic" to the calculation. There are two ways to withhold tax on a bonus.

1. Include the bonus in the regular calculation. Tax is withheld on the check as if the standard payroll was higher and thus the percentage withheld will be higher.

2. Withhold federal tax at a flat 25% on the bonus amount.

See IRS Publication 15, page 14, link below.

Customer: replied 8 years ago.
I guess I'm trying to figure out how much the employee will be taxed? Same as regular salary or more? And, if more, any way around that for the employee's benefit?

Please provide following information:

  • your gross pay
  • gross amount of bonus
  • how you filled W4 form - single/married? number of allowances?
  • in which state do you work?

I will do withholding estimate both ways.

Customer: replied 8 years ago.

All I want to know is if she's making $50,000 and is going to get a $1,000 bonus. What's the tax on that $1,000 bonus vs. the extra $1,000 if we just upped the salary to $51,000?

The most common practice is to withhold 25% for federal income tax from the gross bonus pay as this is considered a supplemental wages. Plus state income tax if applicable.

Thus for $1000 bonus you should withhold:

  • federal income tax 25% - $250
  • Social security - 6.2% - $62
  • Medicate tax - 1.45% - $14.5

You may, however, withhold federal income tax the same way as from regular wages based on W4 filing (single/married? number of allowances?). The choice - how to withhold - should be made by the employer and should be applied to all employees during the year - you may not withhold differently for different employers.

Customer: replied 8 years ago.

Okay. So, the tax to the employee is the same either way?

The withholding type for supplemental wages - yes - that should be the same for all employees. Most employers withhold flat 25% from bonuses.

If you as an employer selected to withhold all supplemental wages based on W4 filing, and

considering Gross Pay of $50,000.00 paid weekly and W4 was filled by the employee as Single with 2 Exemptions,

the paycheck should look as

Weekly Gross Pay $962
Federal Withholding - $126
Social Security - $60
Medicare - $14
Net Pay - $762

If at the same pay period, the employee receives $1000 bonus - the paycheck should look as

Weekly Gross Pay - $1,962
Federal Withholding - $385
Social Security - $122
Medicare - $28
Net Pay - $1,427

Please be aware that the actual taxes would be determined at the time the person files tax return based on all circumstances.

Customer: replied 8 years ago.

Why is the federal withholding so much higher in the bonus example? Everything else is approximately double. But, Federal withholding is over triple.

Because the gross pay for pay period is more than doubled - from $962 to $1962 - so the withholding does...

the actual ADDITIONAL federal withholding from the bonus is $385 - $126 = $259 - so there is almost no difference in this case.

but the result might be different if you pay biweekly, or W4 is filled differently.

Customer: replied 8 years ago.
But, 1962/962 = 2.04. Almost exactly 2X.

Social Security goes from $60 to $122. What we'd expect.

But, Fed goes from $126 to $385. We'd *expect* it to be 2.04 * $126 = $257 Total. No?

No - that is incorrect expectation.

While Social Security withholding is based on the flat rate - federal income tax withholding is based on withholding tables which in turn are based on the tax rate schedule - the more the person earns - the larger percentage of income taxes he/she will likely pay. There is no neither flat rate for federal income taxes nor for income tax withholding from regular wages.

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 29558
Experience: Taxes, Immigration, Labor Relations
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