Are Bonuses Included in Gross Income for Taxes?

A bonus from your employer may reward you for superior performance, recognize some special achievement or just acknowledge longtime service. It can be cash at end-of-year holiday time, a paid vacation trip, a car or any other award. Whatever form a bonus has, it is taxable income in the eyes of the Internal Revenue Service. You have to report it on your federal income tax return.

On Your W-2

Any bonus or award should be included in your W-2 statement provided by your employer at the end of each tax year. The amount will be in Box 1, wages, tips and other compensation, lumped in a total for all your compensation. A bonus will be reported for the year in which it is paid. If your employer promises you a bonus next year, you won't have to report it until next year.

Non-Cash Bonuses

If the bonus is not cash, but a trip or goods, you have to report the fair market value. The employer should report this on the W-2. It will be included in that box with wages and other compensation and not reported separately. If the bonus is in the form of a stock option, for instance, the employer should show the fair market value of the stock at the time of the bonus.

Tax Withholding

An employer can withhold income tax from any bonus. Any withholding will be based on a form W-4 which you filled out, showing exemptions and other information. The amount withheld will be included in Box 2, federal income tax withheld. It will be included with withholding from wages or other compensation and not reported separately.

Service Exception

A bonus in the form of tangible personal property given for length of service or comparable achievement does not have to be reported as taxable income if it is something other than cash, a gift certificate or similar item. It clearly has to be an achievement award and not something to disguise pay. The value can't be over $1,600, the award can't be for less than five years service and it can't be in addition to another service award within the previous four years.

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