Home > 2013 > Personal Finance > Why Your End-of-Year Bonus Isn’t As Big As You Think

Why Your End-of-Year Bonus Isn’t As Big As You Think

Advertiser Disclosure Comments 0 Comments

We’re nearing the time of year when many businesses distribute end-of-year bonuses to high-performing employees (or holiday bonuses to all). And the number you hear from your boss is likely to be bigger than the one you see on your paycheck. Blame the difference on tax withholding.

Unless your bonus is $1 million or so, your employer is required to withhold at least 25% of the total bonus for federal taxes. And if your bonus is less than $1 million, take heart; the really high rollers have even more withheld from theirs. (Other taxes, like state taxes and Social Security, will be withheld as well.)

Employers have a choice of withholding 25% or using what is called the “aggregate method,” according to TurboTax. Let’s say you’re getting a bonus of $10,000. Your employer might choose to withhold $2,500 for federal taxes, but that’s not required. The alternative is to add the bonus to your regular paycheck (let’s say that’s $2,000), and then withhold from the combined total the federally mandated tax rate (as if your regular paychecks were $12,000 apiece).

It’s possible for a bonus to push your income into a higher tax bracket. If you are concerned about that, you could ask your employer to wait until January to give you your bonus, pushing the income — and tax obligation — into 2014.

The amount withheld from your bonus is unlikely to match your tax obligation exactly. The amount you owe in taxes will depend on your individual circumstances, and the amount withheld from your bonus check, or the way it was calculated, will not affect it.

Image: Pogonici

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.