What’s the Bonus Tax Rate? | H&R Block
December 22, 2016 : Monica Welsh – The Tax Institute
Nearly 80% of employers offer holiday or year-end bonuses, according to a study conducted by Challenger, Gray & Christmas, Inc. Bonuses can come in the form of extra cash, gifts cards, and gifts. While it is always exciting to be surprised by a “gift” from your employer, there are important tax consequences to any holiday bonus received. So, we’ve described some important points on the bonus tax rate.
If your employer offers extra $100 at the end of each year, they should add the bonus to the W-2 you receive in January. The bonus is treated similarly to wages, and is taxed as such. You will report the bonus as wages on line 7 of Form 1040.
In the eyes of the IRS, gift cards are treated as cash equivalents and will be taxed the same as described above.
Withholding rules are also important to understand here because it may affect your tax liability on your return if you under-withheld for the year. Often there may not be withholding on the bonus, especially if your employer just gave you a $100 bill at the company holiday party.
Even though bonuses are often taxed at the same rate as your wage, there may be instances of differences. For example, if your bonus was paid separate from your normal paycheck; like a check or cash at the holiday party. Different tax treatment may also occur if you are lucky enough to receive a bonus of more than $1 million.
Bonus Tax Rate Brackets
Our tax treatment of bonuses from earlier in the year gives more detailed information on the treatment of bonuses:
< $1 million
The taxation on bonuses less than $1 million depends on whether the bonus is included in the same paycheck as your other wages or in a separate paycheck. Bonuses paid your other wages, and not separately identified, will be taxed in the same manner as your other wages. However, by combining the two for that tax period, your tax rate for that period may increase as if that was the amount you would be paid each paycheck for the remainder of the year.
If the bonus is paid or identified separately, it can be taxed at a flat rate of 25%. Your employer can also choose to treat the bonus as it was paid with other wages to determine your tax rate. Either way, the paying of the supplemental wages will increase your tax rate for that period, so be prepared.
> $1 million
Any excess wages over $1 million will be taxed at a rate of 39.6%.
Reporting Cash Bonuses
Even though bonuses generally have a different tax treatment, they should still be reported on your W-2. If your employer reports them on a 1099-MISC, you should immediately request a cancellation of the 1099-MISC and a corrected W-2. If your employer will not provide a correction, you can still appropriately report your bonus. Report the wages shown on the 1099-MISC on line 7 of your Form 1040 and supply Form 8919 to report your uncollected Social Security and Medicare tax.
If you receive a non-monetary gift from your employer every year — think holiday ham, ornament, or even a weekend getaway — you likely will not be taxed on this gift. These types of gifts are often referred to as de minimis fringe benefits and are excluded from your income.
In most cases, your employer will determine whether a non-monetary is a de minimis fringe benefit. A de minimis fringe benefit is occasional or unusual in frequency, and small enough in value to make the accounting for it unreasonable or impractical.
The de minimis fringe benefit rules do not apply to gifts of cash or cash equivalents. Therefore, the rules discussed above in the “cash bonuses” section to any gift of cash received by an employer.
View more gift and bonus tax rate information.