The tax withheld from bonus income is often more than the tax withheld from your regular pay. Your payroll department either withholds tax on your bonus income at a flat rate or applies your regular rate to your combined salary and bonus income. Although your regular rate is applied in this scenario, combining your salary and bonus on one check could put you in a higher withholding bracket, causing the tax allocated to your bonus to actually be higher than the regular rate. However, you’re allowed to adjust your withholding any time by simply providing a new withholding allowance certificate to your payroll department.
Determining Your Withholding Method
Ask your payroll department if your bonus check will be paid separate from your regular paycheck or if your bonus and regular pay will be combined on one check. Each method has different income tax withholding rules, so you’ll need this information to perform an appropriate adjustment.
You may find that claiming exempt for one paycheck will be a solid financial move that doesn't create an excessive tax burden at year end. However, it is essential that you understand the implications of a tax exempt bonus check and what they may require for tax reporting.
Looking For Allowances
If your employer combines regular wages with your bonus income, gather your most recent pay stub and use the IRS Withholding Calculator on the IRS website to estimate the number of allowances you should claim. The calculator asks for an estimate of the federal income tax withheld from your pay to date, including bonuses. Estimate that the amount withheld from your bonus will be 22 percent. If the calculator results show you should adjust your W-4 allowances, you’ll see a message with the number of allowances to claim on line 5 of your W-4.
Obtaining Your Forms
Download Form W-4 from the Internal Revenue Service website. Complete sections 1 through 3 with your name, address, Social Security number and marital status.
Calculate your withholding adjustments. If your employer issues separate bonus checks that do not include any regular wages, considered supplemental income, your employer withholds income tax at a flat rate of 22 percent. If you happen to receive a bonus in excess of $1 million, the IRS taxes that amount at 37 percent.
These rates are automatic, which means the marital status and number of allowances you normally claim are irrelevant. In this case, write “Exempt” on line 7. This is the only withholding adjustment you can make to separate bonus check payments.
Completing Your W-4
Sign and date your new W-4 form. Give the form to your payroll department as soon as possible before your bonus check payments. Check with your payroll department for time restrictions, as many companies need at least one to two pay periods to process new W-4 information.
If you claim "Exempt" on your new W-4 form for the bonus payment, remember to submit a new W-4 form with your regular withholding allowances after you receive the bonus income. If you fail to change your allowances back from "Exempt," you'll have insufficient withholding for the rest of the year. This could result in a hefty tax bill when you file your next return.
Going tax exempt for a pay period is always an option, but you should ensure that you have the right information to ensure that your reporting goes as smoothly as possible.
- If you claim "Exempt" on your new W-4 form for the bonus payment, remember to submit a new W-4 form with your regular withholding allowances after you receive the bonus income. If you fail to change your allowances back from "Exempt," you'll have insufficient withholding for the rest of the year. This could result in a hefty tax bill when you file your next return.
With a background in taxation and financial consulting, Alia Nikolakopulos has over a decade of experience resolving tax and finance issues. She is an IRS Enrolled Agent and has been a writer for these topics since 2010. Nikolakopulos is pursuing Bachelor of Science in accounting at the Metropolitan State University of Denver.