Are Bonuses Really Taxed More?

Brandon R. Amaral, CFP®, EA
Brandon R. Amaral, CFP®, EA

Founder & Financial Planner, Amaral Financial Planning

If you’ve ever received a cash bonus from your job, you were probably disappointed when you saw your paycheck. While your manager promised you a $10,000 performance bonus or commission payout, you actually only received $6,000 in your bank account.

This can cause significant financial stress if you were counting on the full payout to pay a bill or purchase a gift. It is not only important to be aware of how much cash you will actually receive, but also whether you will be on the hook for more taxes and need to make an estimated tax payment.

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Here is an overview of supplemental income taxes:

Are bonuses really taxed more?

A common misconception is that bonuses are taxed more than your salary or hourly pay. Because of this, some people will opt out of receiving a bonus for fear of paying higher taxes.

This is not true at all! Although the tax withholding for your bonus may be higher than your standard paycheck, it does not mean that you are paying more total taxes. Your total income for the year will determine whether you will get some of the withholding back as a tax refund or not.

What is supplemental income?

The IRS typically considers any income outside of your regular salary or hourly pay to be supplemental income. This includes bonuses, commissions, restricted stock units (RSUs), severance payments, relocation packages, or retroactive salary increases.

What are supplemental tax withholding rates?

Supplemental tax withholding rates are flat tax rates that the IRS requires your employer to withhold on your supplemental income. Depending on your total income or state of residence, your supplemental income will vary:

  • Federal tax withholding starts at 22% and increases to 37% (for supplemental wages over $1 Million).
  • Social Security tax withholding is 6.2% on the first $147,000 of wages (for 2022).
  • Medicare tax withholding starts at 1.45% and increases to 2.35% (for wages over $200,000).
  • California tax withholding is 10.23%.

Are you over or underpaying taxes?

Your total expected income for the year will determine if you are over or under-withheld on your payroll taxes. If you are significantly under-withheld, you could be required to make an estimated tax payment or face underpayment penalties and interest.

For example, let’s assume you are Single and your salary is $200,000, which puts you in the 32% Federal tax bracket. If you receive a $5,000 bonus, the Federal tax withholding will be $1,100, which is 22%. In this case, you are under-withheld by $500.

In another example, let’s assume you are Married and your total salary is $100,000, which puts you in a 9.3% California tax bracket. If you receive a $20,000 commission payout, the California tax withholding will be $2,046, which is 10.23%. In this case, you are over-withheld by $200.

Understanding the ins and outs of supplemental income and tax withholding rates can help you best prepare for your monthly budget and future tax bill. If you would like to work with a financial planner to walk you through your options, I would love to help you!

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Disclaimer: This blog is for informational purposes only, and should not be considered advice or recommendations. All opinions expressed herein are solely those of Amaral Financial Planning, LLC, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made to another parties’ informational accuracy or completeness. You should consult your financial advisor, tax professional or legal counsel prior to implementation.