How to Determine the Tax on your Company Bonus Payment

It's nice getting a year-end bonus from your company. It feels like a great Christmas present. You're jumping for joy, dancing around like a kid, then wham! You see your payment statement and it's nowhere close to the amount you were told. You start thinking, someone made a mistake. The statement shows the correct amount, but there must be something wrong with the tax withholdings. It's too high!?! Not really. Here's the explanation...

Things You'll Need

• Company bonus
• Need for understanding

Instructions

1. The statutory federal withholdings for a bonus is 25%. On top of this, you need to add other taxes such as state, social security, etc. Overall, the average total tax withheld comes out to around 40%. That is, if your bonus was $1,000, then the tax withheld would be about $400 and you would only get $600. This is why there's such a big surprise when someone experiences this for the first time. The exact amount will depend on your specific situation such as how many dependents you've declared.

2. For year-end tax purposes, the bonus is simply considered a part of your salary. For example, if you normally make $50,000 per year, your total gross income would be $51,000. So, when you file your tax returns, your total income for the year is $51,000 and you will receive refunds based on that amount.

3. Another question you might have regarding a company bonus is whether the employee can choose to not have the withholdings held. The answer is no. The company is required to take the taxes out. Another question is whether the tax can be deducted. The answer is again no. This is the reality that you must face whenever you get a bonus.