Tax Rates for Bonuses: What You Need to Know

Bonuses are subject to income taxes, but the IRS does not consider them regular salaries. Instead, they are classified as supplemental income and may be subject to different federal withholding rules. This means that bonds are heavily taxed due to their supplemental nature. All the dollars you earn are equal when you pay taxes, but when bonds are issued, the IRS considers them supplemental income and keeps you with a higher withholding rate.

You will also be required to withhold FICA tax from your employees' additional salary. The FICA tax rate remains the standard 7.65% tax rate for bond payments. Don't forget to consider the Social Security salary base limit and the additional Medicare tax. The percentage method, also called the flat rate method, is the easiest way for employers to calculate taxes on a bonus.

While none of these options allow you to withhold more money from your bond, they do offer tax breaks that could offset the tax on your bond. You must withhold federal, state and local income taxes, as well as the FICA tax, from each employee's supplemental salary. Rather than adding it to your regular income and taxing you at your highest marginal tax rate, the IRS considers bonuses to be “supplemental wages” and applies a fixed federal withholding rate of 22 percent. With the aggregated method, the tax withholding on your bond is calculated based on your regular income tax rate.

In addition to the federal tax of 22 percent, you'll also pay the Social Security (or FICA) tax and the Medicare tax. Employers should use the number of deductions together with the withholding tables in IRS Publication 15 to determine the amount of federal income tax to be withheld. From there, you can see if your employer will calculate your tax withholding at the flat rate of 22 percent that the IRS allows for supplemental salaries. Individuals should consult their own tax advisor for specific issues related to their own taxes and nothing communicated to them in this document should be considered tax advice. Greene-Lewis says that in some cases, depending on your income and tax rate, some of this money may be returned to you in the form of a tax refund.

Often, when wage taxes plus bonuses are calculated together in this way, your initial tax withholding is higher. If the tax withholding on your bond turns out to be higher than necessary, you may receive a tax refund for the overpayment.