Why is bonus pay taxed higher

In addition to the federal income taxes you have to contend with, you will also have to pay other taxes on this supplemental income. Social Security, Medicare, unemployment taxes and any state or local taxes applicable to your income must be paid as well.

However, you may avoid having to pay any additional Social Security tax on your bonus if you have already exceeded the Social Security tax limit. Because the U. Contrary to popular belief, taxpayers are not taxed at one rate. Rather, your income is taxed at different increments ranging from 10 to 37 percent. If your marginal tax rate is 10 percent, a nice bonus could push the amount of your income that exceeds the 10 percent bracket's limit to the 12 percent tax rate.

Personal Finance Taxes. But it does mean that you could see less of the cash from your bonus upfront. Use this bonus taxation calculator to figure out how much tax you'd pay on the amount of your bonus using either method, so you can know exactly how much money to expect.

While you can't avoid paying taxes on your bonus entirely, you can use your bonus funds wisely to reduce how much you'll owe at tax time. Use the funds to invest in your k or IRA to get a tax break. And if you expect to take a pay cut in the next year—for example, if you're ready to retire—ask your employer to defer your bonus until the following tax year to lower your overall tax liability. Remember, with TurboTax , we'll ask you simple questions about your life and help you fill out all the right tax forms.

Whether you have a simple or complex tax situation, we've got you covered. Feel confident doing your own taxes. Just answer simple questions about your life, and TurboTax Free Edition will take care of the rest. For Simple Tax Returns Only. How Bonuses are Taxed Calculator. State income tax might also apply based on where you live. Employers can compute supplemental income withholding taxes in two ways.

They can use the percentage method or the aggregate method. When an employer taxes your supplemental wage using the percentage method, it must identify the supplemental wage separate from normal wages. In the percentage method, the withholding tax rate for a bonus is 22 percent. Sometimes employers pay bonuses alongside normal wages. In this situation, your employer must use the aggregate method to determine the initial tax withholding on your supplemental income.

Your employer withholds a flat percent tax from the bonus while your paycheck is taxed as normal. Sorry if we completely ruined your happy mood on the bonus situation by throwing confusing explanations in your face. The good news is that you got the bonus, right?! Consider saving that money in your emergency fund , stashing it into your retirement account or even investing it so that you can set yourself up for financial success later. Is something incorrect? Let us know.