Many people believe that the extra income that comes from a bonus, which is not exactly “extra,” hypothetically places them in a higher tax bracket. They believe this is a bad thing due to the fact that it could mean that they have to pay a higher federal income tax rate on all of their earnings. However, this is a misconception. These erroneous beliefs and the eventual complaints are worsened when the bonus checks are received with a net payment that represents a fraction of the gross income shown on the pay slip.
The IRS handles bonus income in the same way as regular income. The taxable W-2 income is summed up in one box the moment you file your tax returns, and the same tax rates apply. The catch here is that the IRS has no discrimination against bonus pay, but employers usually do.
Employers are allowed to make a decision between three methods of withholding taxes from bonus income, once it is given to the employee separately from the regular income.
1. The employer may withhold a flat rate of 25% for income taxes from the bonus payment.
2. The other option is for the employer to add the bonus payment to the earliest regular payment, establish the average withholding of the sum of the two payments, deduct the amount withheld from the latest regular income payment, and withhold the rest from the bonus.
3. This option is for employers who opt to link bonus pay with regular income in one payment without differentiating between the two types of earnings. Here, the employer is permitted to base withholding on the total sum of the bonus and regular income by utilizing the ordinary withholding tables.
It does not matter what technique the employer settles for; the bonus and regular income will be put together once you have filed your taxes.
One intriguing omission to the concept that bonuses are taxed in the same manner as other income relates to investment managers and hedge funds. This kind of income is referred to as “carried interest.” Investment managers usually acquire their bonuses from investment profits, and these are taxed at rates of 15%. This rate is considerably lower than their marginal tax rates.
Do not hesitate when it comes to earning a bonus. Your boss may withhold more of your money for taxes than usual, but in the end, it will level out once you have filed your taxes.
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Article Source: http://EzineArticles.com/6152925
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