Holiday Bonus Taxes
Editor’s Note: Ever wonder what the bonus tax rate is on your holiday cash bonus or signing bonus? We’re here to tell you!
Nearly 80% of employers offer holiday or year-end bonuses, according to a study conducted by Challenger, Gray & Christmas, Inc. Bonuses are common, yet what is often overlooked is how they are taxed.
Tax on Bonuses 101
A bonus can be awarded in the form of cash, gifts cards, or gifts. While it’s always exciting to be surprised by a “gift” from your employer, there are important tax consequences for any random cash or holiday bonus received. Let’s cover some important points regarding the tax on your bonus—like the bonus tax rate for 201, signing bonus tax, and tax reporting on bonuses.
How Much Are Bonuses Taxed?
Long story short, bonuses are taxed differently, depending on the form of payment and amount. Read on for more details…
The Cash Bonus
One of the most common end-of-year bonus delivery methods is cash or check from your employer. If your employer does this, the bonus amount should be added to the W-2 you receive in January. A cash bonus is treated similarly to wages, and is taxed as such. You will report the bonus as wages on line 1 of Tax Form 1040. (Or use the expertise of a tax pro to help you do so.)
Signing Bonus Tax
Recently accepted a new job? Signing bonus taxes would fall in the above category if received via cash gift.
Non-Monetary Gift Bonuses
If you receive a non-monetary gift from your employer every year — a holiday ham, ornament, or even a theater or sporting event ticket — you likely will not be taxed on this gift. This category of gifting is often referred to as “de minimis fringe benefits” and is excluded from your income.
In most cases, your employer will determine whether a non-monetary gift is a de minimis fringe benefit. A de minimis fringe benefit is occasional or unusual in frequency, and small enough in value to make the accounting for it unreasonable or impractical.
The de minimis fringe benefit rules don’t apply to gifts of cash or cash equivalents. Therefore, the rules discussed above in the “cash bonuses” section apply to any gift of cash received by an employer.
Gift Card Bonuses
Some employers surprise their employees with a gift card around the holidays or after reaching an important sales milestone. In the eyes of the IRS, gift cards are treated as cash equivalents and are taxed the same as cash or a check.
Withholding Taxes on Bonuses
It’s important to understand the withholding rules for bonuses because the tax liability on your tax return may be affected if you under-withheld throughout the year.
Even though bonuses are often taxed at the same rate as your wages, there may be instances of differences. For example, if your bonus was paid separate from your normal paycheck, like a check or cash at the holiday party. Different tax treatment may also occur if you are lucky enough to receive a bonus of more than $1 million.
Bonus Tax Rate – Brackets
Tax on a Bonus Equaling Less Than $1 Million
The taxation on bonuses less than $1 million depends on whether the bonus is included in the same paycheck as your other wages or in a separate paycheck.
Bonuses paid with your typical wages, and not separately identified, will be taxed in the same manner as your usual wages. However, by combining the two for that tax period, your tax withholding percentage for that period may increase as if that was the amount you would be paid each paycheck for the remainder of the year. If the bonus is paid or identified separately, it can be taxed at a flat rate of 22%.
Either way, the paying of the supplemental wages will affect your tax withholding for that period, so be prepared.
Tax on a Bonus Exceeding $1 Million
Any excess wages over $1 million will be taxed at a rate of 37%.
Tax Reporting of Bonuses – Where Do You Start?
Although a cash bonus may receive a different withholding treatment, it should still be reported on your W-2.
- If an employer reports your bonus on a 1099-MISC, you should immediately request a cancellation of the 1099-MISC and a corrected W-2.
- If your employer will not provide a correction, you can still appropriately report your bonus for tax purposes. Report the wages shown on the 1099-MISC on line 1 of your Form 1040 and supply Form 8919 to report your uncollected Social Security and Medicare tax.
Get Help When You Need It
Troubled by the idea of claiming and reporting a bonus on your taxes—or do you have general bonus tax questions? Use tax-filing products from H&R Block to help.
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