Taxation of Bonuses in 2025: Understanding the Tax Implications of Bonuses

In the world of employment, bonuses can be a significant part of an employee's income. However, understanding how these bonuses are taxed can be a complex matter. Here's a breakdown of the key points to help you navigate this topic.

Firstly, employers have two methods to calculate tax withholding on bonuses: the percentage method and the aggregate method. The percentage method applies a flat 22% rate to supplemental wages, including bonuses, up to $1 million during the tax year. On the other hand, the aggregate method calculates tax withholding on bonuses at the employee's regular income tax rate.

It's important to note that the search results do not provide specific names of companies that have paid particularly high or low taxes on bonus payments. They mention general tax rules and examples of bonus models from various companies, but no detailed tax deduction figures for these bonuses are given.

If a bonus qualifies as an employee achievement award, it might be exempt from federal income taxes under certain conditions. These conditions include the bonus not being cash, a cash equivalent, tickets to events, vacations, stocks, bonds, or other prohibited items, and the total value not exceeding $1,600.

If a bonus amount exceeds $1 million, the withholding rate for any amount above $1 million is 37%. This rate applies regardless of the method used for tax calculation.

If too much is withheld from a bonus, the employee should receive a tax refund when filing their tax return. Conversely, if too little money was withheld from income throughout the year, the employee could wind up owing the IRS.

Another strategy to lower the tax withholding on a bonus is to stash it into a pre-tax account such as a 401(k) or IRA. This approach shields the bonus from being counted in your taxable income in the current year.

The employee can control their withholding rate by how they fill out their Form W-4. By adjusting the allowances claimed, they can instruct their employer to withhold more or less tax from their income.

If your tax return is filed as single or head of household, you would be in the 22% federal tax bracket for an annual salary of $72,000 ($6,000 x 12). However, if your income exceeds $192,000, using the aggregate method, the tax withholding on a bonus would be calculated as if your annual income was $192,000, bumping up the tax bracket to 24%.

Lastly, it's essential to remember that the IRS classifies bonuses as "supplemental wages." A supplemental wage is money paid to an employee that isn't part of his or her regular wages. Examples of supplemental wages include, but aren't limited to: bonuses, certain commissions, overtime pay, accumulated sick leave, severance pay, prizes and awards, back pay, reported tips, retroactive pay increase, payments for non-deductible moving expenses.

In conclusion, understanding the tax implications of bonuses can help employees make informed decisions about their income. By knowing the methods used for tax calculation, the potential for tax exemptions, and strategies to lower tax withholding, employees can maximise their take-home pay and avoid unexpected tax bills.