As the year draws to a close and the holiday season fast approaches, several individuals in the United States are in line to receive some type of financial bonus, especially if they have helped their company meet its annual financial goals.
These bonuses are usually correlated to one’s performance meaning that the better an employee performs the more likely they are to receive a higher financial remuneration. Not only does this help boost morale but following this system also ensures that a business’s employees will continue to perform at a high level during the coming year.
It is important to note however that bonuses do count toward your income meaning that they will be subjected to both federal and state taxes.
Here’s what you need to know about bonus taxation and how you can reduce your tax liability.
Federal and state taxes
It is important to note that the department of Internal Revenue Services (IRS) does not count any financial bonus under the umbrella of regular wages. Generally, if your bonus is less than one million dollars, it will be subjected to a 22 percent withholding flat rate.
Stated taxes are also levied on your bonus, though the rate varies from state to state.
If your bonus exceeds one million, then it will be subjected to the aforementioned flat rate of 22 percent as well as a further 37 percent for any amount that exceeds the first million.
Other Tax Liabilities
It is also likely that you will end up paying a rate of 6.2 percent in Social Security tax on all your wages including the bonus you receive, which falls below the 147,000 dollar Social Security cap for the tax year 2022.
There is also a 1.45 percent Medicare tax levy on your earnings, which your bonus will also be subjected to.
How to lower your tax liabilities
The best way to lower your tax liabilities would be to divert these funds into your 401k or IRA account to get a tax break.
If you are going to retire and will take a pay cut, asking your employer to defer your bonus is also a smart way to save on the total amount of tax you pay.
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