Finally – your boss recognized all of your hard work, and is showing gratitude in the form of cold, hard cash! You may be mentally planning that vacation you’ve always dreamed of. But consider how the amount will be affected come tax season. Do you have to report, is it taxed, and how much? The answers to your questions about your EOY bonus, below.
What to Do with Your EOY Bonus
Bonuses, According to the IRS
Unfortunately, you must report bonuses as wages, and are therefore taxed. One more piece of bad news: they are actually supplemental wages, which can ultimately mean they will be taxed at a higher rate than your regular salary. Buzz kill, right? Consider the following factors before you grovel too much.
Less than $1 million
Most bonuses fall under this category (if not, you’re one lucky employee). The way the bonus will be taxed depends on how it was paid. Bonuses included in your regular paycheck will be treated and taxed as regular income. However, your tax rate may increase by combining the amounts, as if that is the amount you were being paid for the rest of the year. If you receive a separate check for that bonus, it can be taxed at a flat rate of 25%. Either way, your tax rate will increase for that period.
More than $1 million
Any supplemental income received via paychecks or other means that exceeds $1 million will be subject to the highest tax rate – for 2016, that means 39.6%. The net amount gained might be much less than you anticipated, so be prepared.
Reporting Your EOY Bonus
Despite the distinction made with bonuses, they should be reported normally on a W-2. If your employer wants to do so on a 1099-MISC, request that it be cancelled. If you are unable to adjust your W-2 in place of the 1099-MISC, you can still report the bonus correctly. Report the wages on your 1040 shown on line 7 of the misc form, and also file Form 8919 to report uncollected Social Security and Medicare tax.
Bonuses come to those deserving, but take that amount with a grain of salt. After taxes, we’re sure you can do something with it – we recommend saving it, just like your tax refund.