Cracking the Code: Understanding Bonus Taxation
Author: Jason Buzi / Date: August 6, 2023 / Tags: taxes
(MoneyHippo.com) – When you receive a bonus from your job, it’s like a little party in your paycheck! However, this extra money doesn’t come without some strings attached – taxes. Understanding how bonuses are taxed can help you anticipate how much money you’ll actually take home.
In the U.S., the Internal Revenue Service (IRS) considers bonuses to be “supplemental wages.” Supplemental wages include payments like bonuses, commissions, overtime pay, and more. They are additional payments beyond your regular wages.
The IRS applies one of two methods to tax these supplemental wages. The first method is called the “Percentage Method.” In this method, a flat rate of 22% is applied directly to your bonus amount. For example, if you received a bonus of $1,000, $220 (or 22%) would be taken out for taxes.
The second method is the “Aggregate Method.” In this method, your bonus is added to your regular pay, and the total is taxed as one large paycheck. This can sometimes push you into a higher tax bracket, causing you to pay more taxes. For example, if your salary is $50,000 and your bonus is $10,000, they are combined and taxed as if you made $60,000.
Taxes on bonuses can seem complicated, but don’t let that dampen your excitement! Understanding how these taxes work helps you plan your finances more efficiently. So, the next time you receive a bonus, remember – it’s not just a treat, it’s also a chance to learn about taxes!
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