As the holidays come and go and with the New Year quickly approaching, individuals will hopefully be celebrating with a year-end annual bonus. Uncle Sam and the rest of the government will be celebrating your supplemental income right along with you.
When bonuses are issued, they’re considered supplemental income by the Internal Revenue Service. Supplemental income is defined by the IRS as compensation paid in addition to the employee’s regular wages.
There are two primary ways in which employers withhold taxes from your bonus checks:
- Aggregate method
- Percentage method
The aggregate method is what is used when one’s bonus is added to one’s normal weekly or biweekly paycheck. As the bonus plus regular paycheck is added, his or her employer will be required to withhold a higher amount than if the paycheck was without the bonus. Depending on the size of one’s bonus, the aggregate method can be more tax advantageous.
The percentage method will be used if ones employer provides the bonus check separately from the weekly or biweekly paycheck. Companies will withhold 25% of the bonus check.
GBQ has professionals and experts in this area that should be able to find ways to limit your tax burden.
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