Yes, bonuses are considered supplemental wages and therefore are taxable. Conversely, if the employer decides to separate the bonus from regular pay, then the employer has two choices on taxing the bonus amount. The first option is to withhold a flat tax percentage set by the IRS from the bonus amount.

Why are bonus checks taxed differently?

Why bonuses are taxed so high It comes down to what’s called “supplemental income.” Although all of your earned dollars are equal at tax time, when bonuses are issued, they’re considered supplemental income by the IRS and held to a higher withholding rate.

What is the tax rate on a bonus check?

Percentage: In many cases, the IRS will use the percentage method because your employer will pay your bonus separate from your regular pay. With this tax method, the IRS taxes your bonus at a flat-rate of 25 percent, whether you receive $5000, $500 or $50 — however, if your bonus is more than $1 million, the tax rate is 39.6 percent.

Why are bonuses separate or come in payroll checks?

Another consideration is the impact on employees. Because of the flat rate used for separate payments, using this method may cause employees with high salaries to have too little tax withheld, resulting in a tax liability when the employee files his tax return.

Can you control the tax treatment of a bonus?

Control the tax treatment of a bonus or the withholding of retirement account deductions. For example, an employee might want a discretionary bonus to be withheld at the flat 25% supplemental rate for federal income tax. It is not possible to control the tax rate when you include the bonus on a payroll check.

Why are bonuses taxed differently than Commission pay?

The problem with this method is that employees are more likely to end up with higher tax obligations. Unlike the simpler percentage method where the IRS will only withhold 25% from the bonus or commission, it’s almost always certain that one will incur a higher rate on both the normal pay and the supplemental wage.