Why Is My Bonus Taxed So High

Why Is My Bonus Taxed So High

Why Is My Bonus Taxed So High?

I was excited to hear that I was going to be on the “bonus” program at my previous employer and I had already earmarked how my first bonus payment would be spent…a vacation with my family, a contribution to my IRA, and the rest on new clothes for the kids. I was filled with anticipation of my bonus, until I saw the direct deposit in my bank account. My heart sank when I realized the amount was not what I expected. 

Then I saw it. The taxes.

Why are the taxes on my bonus so high?

The simple answer is that taxes on a bonus are not higher than a regular paycheck. The tax withholdings are higher. Still scratching your head? Read on for more details.

Tax Withholdings vs. Actual Taxes

If you’re a regular, W-2-receiving employee, your employer withholds taxes on any paycheck. These withholdings are an estimate of your taxes. Your actual taxes are determined after the end of the year when you prepare your tax return. Sometimes these withholdings are too high (woo-hoo, you get a refund) and sometimes they are too low (boo, you have to write a check).

When you receive your normal paycheck, your tax withholdings are based on the W-4 (federal withholding form) you completed for your employer when you first started. The W-4 includes information about your marital status and deductions (typically, how many mouths you’re feeding). The estimated tax withholdings on your normal paycheck are usually pretty accurate (assuming you filled out your W-4 correctly).

How Your Bonus is Different

When a bonus is received in a separate check (like in my example), employers often use a flat tax withholding percentage instead of the “normal” withholding. This percentage varies, but is typically 25% for federal taxes. In many cases, this is higher than your normal withholding.

If you receive your bonus with your normal paycheck, your employer may use the “normal” withholding amounts instead of a flat percentage. However, tax withholding tables are used as if your current paycheck is a regular paycheck (and assumes that you will continue to make the same, higher amount for each paycheck going forward) resulting in a higher tax withholding percentage than normal.

Either way – using a flat percentage or the normal withholding – you end up having a higher percentage of taxes taken out of your bonus than you expect.

Don’t Despair 

As mentioned, tax withholdings are not the same as your actual taxes. If your employer takes too much out of your bonus check, you will get that money back when you file your taxes.

Example: Let’s say your bonus check is $10,000 (hooray!). Your employer uses a flat withholding percentage, so the federal tax withheld from your bonus is 25%, or $2,500. When you eventually file your tax return, if your tax rate is only 20%, you will get that extra $500 back as part  of your tax refund.

So remember, your bonus check is not actually being taxed higher. While there may be a higher % of withholding on your bonus check, the taxes aren’t necessarily higher.

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