Why do bonuses get taxed more




















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. The Tax Benefits of Your k Plan. Changing Jobs? Are Tips Taxable? Estimate your tax refund and where you stand Get started. See if you qualify for a third stimulus check and how much you can expect Get started.

Easily calculate your tax rate to make smart financial decisions Get started. Next year, about two out of three big employers plan to award annual performance bonuses, and nearly that many will keep the size of the bonus pool the same as this year, according to the survey. First, you can reduce your gross income. Second, you can increase the deductions that apply to your income.

One of the most effective ways to reduce taxes on a bonus is to reduce your gross income with a contribution to a tax-deferred retirement account. This could be either a k or an individual retirement account IRA. The limitations are different for different types of retirement accounts. They also change from year to year. For , the limits are;. These contributions reduce your gross income by the contributed amount.

You can also withdraw from an HSA to pay qualified medical expenses without incurring taxes, which makes this one of the most attractive tax-management strategies. Sometimes employers pay bonuses alongside regular wages. In this situation, your employer must use the aggregate method to calculate the initial tax withholding on your bonus.

The result is often a headache for the employer who is figuring the tax withholdings and possibly more money withheld from your bonus. With the aggregate method, the tax withholding on your bonus is calculated at your regular income tax rate. The withholding rate is based on your tax bracket. Often, when taxes on wages plus bonuses are calculated together this way, your initial tax withholding is higher. That income amount would put you in the 22 percent federal tax bracket assuming you file your tax return as single or head of household.

The employer would subtract the taxes already withheld from your last paycheck and take the remainder out of your bonus amount. The IRS will expect its cut of any bonus you receive. The exception to this rule is if your bonus can qualify as an employee achievement award. You might be able to avoid paying federal income taxes under the following conditions:. The method your employer uses to calculate the federal withholding on your bonus can have a big impact on your take-home pay.

If the tax withholding on your bonus turns out to be higher than necessary, you might receive a tax refund for overpayment. On the other hand, if too little money was withheld from your income throughout the year, you could wind up owing the IRS. You can reduce the risk of owing the IRS money by reviewing your W-4 withholdings. Also, if you receive a large bonus or your financial circumstances change, it may be best to talk to a tax professional for advice.

Want to lower the amount of taxes withheld from your bonus? Consider asking your employer to pay your bonus separately from your regular paycheck. From there, you can see if your employer will calculate your tax withholding at the 22 percent flat rate the IRS allows for supplemental wages. How We Make Money. Kay Bell. Written by. Edited By Lance Davis. Edited by.



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