Buzz
Although it's hard to complain about a bonus, the taxes can be harsh. The IRS treats your bonus as "supplemental income," which means it's taxed at a higher rate. If you expect a bonus this year, use this calculator to estimate how much will be withheld.
Business Insider explains why your bonuses are taxed so heavily, and it's actually quite straightforward: supplemental income is taxed at a higher rate. Bonuses are taxed using one of two methods: the percentage method or the aggregate method.
The percentage method:
This method is used when you receive your bonus separately from your regular paycheck. Your employer applies a flat 25% withholding tax to simplify the process.
The aggregate method
: This method applies when your bonus is added to your regular paycheck. Your employer will withhold tax based on both your bonus and regular income, according to the details on your W-4. Since you're receiving more money than usual, your employer will withhold a higher amount.
Keep in mind, this is only the withholding rate, not the actual tax amount you’ll pay. While a significant portion of your bonus may be withheld initially, if you end up overpaying the IRS, you’ll receive the excess back during tax season.
TurboTax notes that many employers prefer the percentage method, but Paycheckcity offers a helpful calculator for both methods. Just input your paycheck and bonus details, add any other relevant tax information, press enter, and the calculator will show you how much will be withheld.
You can try it out yourself by visiting the link below.
