Earning a bonus at work is great for your pocketbook, but you won’t be taking it all home. Instead, your employer is required by the Federal Insurance Contributions Act (FICA) to deduct a percentage of your income for payroll taxes. In addition to Medicare and Social Security tax on the bonus, your employer also has to withhold federal income taxes. Knowing the rules for tax withholding helps you know how much you can expect to take home when your bonus is paid.
The statutory rate for withholding on bonuses is 22 percent in 2019, but your employer might instead add the bonus to your regular wages and withhold taxes at your normal withholding rate.
IRS Tax Withholding on Bonuses
When your employer pays you a bonus, he has two options for how to withhold income taxes from your pay.
First, your employer can just treat it as part of your regular wages if it is paid at the same time. Under that option, the income tax withholding rate that applies to your regular wages applies to your bonus payment.
Alternatively, if your bonus is a separate payment, your employer has the option to simply withhold federal income taxes at a flat rate as specified for that year based on the tax brackets. Under the flat rate method, your employer must withhold at the specified rate – he can’t pick, or allow you to pick, a rate for federal income tax withholding.
Exception for Large Bonuses
When your supplemental wages, including bonuses, for the year exceed $1 million, any bonuses over $1 million are subject to income tax withholding at the highest marginal tax rate. For example, if you receive a total of $1.1 million in supplemental wages, the last $100,000 is subject to withholding at the highest marginal tax rate.
Withholding for Signing Bonuses
There's another type of bonus you may receive simply by becoming a company's new hire – a signing bonus. Some companies offer these incentives to attract highly skilled employees for certain positions.
If you "sign" with the company, meaning you agree to go to work with the company, you may receive a separate bonus check up-front. Or you may also receive part of the total bonus when you begin work and get the balance after you've worked for the company for a specified time frame.
Regardless of how a signing bonus may be parceled out to a new employee, the tax implications are the same. You're taxed at your marginal tax rate, according to your tax bracket.
Current Flat-Rate Percentage
In 2018 and 2019, the statutory flat rate for withholding for bonus payments is 22 percent. For example, if you receive a $1,000 bonus and your employer uses the flat rate method to calculate your income tax withholding, you’ll have $220 taken out for federal income taxes.
The percentage has decreased from 2017 because the tax cuts have lowered the tax brackets. As always, if the amount withheld is too much, you’ll get a larger tax refund when you file your taxes, but if the amount withheld is too small, you’ll have to pay the difference when you file.