Expecting a Holiday Bonus? What You Need to Know

If you know that your boss is going to be giving you a bonus at the end of the year, congratulations! Getting a holiday bonus is one of the perks of working at a company through the end of the calendar year. You can use your bonus for Christmas presents, holiday vacations and more. But if you want to take full advantage of your holiday bonus, it’s important for you to be well-informed about holiday gift taxes. Here is some helpful information to know about your holiday bonus so you comply with all tax laws. And get the most of your money.

A Tax Guide to Your Holiday Bonus

Cash Bonuses as Supplemental Income

According to the IRS, bonuses that are not given as part of your normal wages are considered to be supplemental income. The IRS considers them a discretionary addition to your normal wages. This means the IRS taxes them separately from the rest of the income you earn. They will tax your bonus at a flat rate of 25 percent.

Cash Bonuses as Part of Wages

If your boss chooses to give you a bonus as part of your wages, then you’ll pay the normal amount of withholding you usually do — except on the aggregate of your paycheck and your bonus together. This can mean the IRS ends up taxing you at a higher rate than they would your normal paycheck.

Non-Cash Bonuses Are Usually Non-Taxable

If your boss gives you a non-cash bonus, like a gift or a fruitcake, they will usually not count as taxable. However, if you can convert the gift to cash, like a gift card, that gift might actually be taxable. Check with your accountant or your company’s accounting department when you receive it. This way, you can make sure you don’t owe any taxes for it.

The Holiday Bonus and Your Tax Return

Once you’ve figured out what taxes you owe for your holiday bonus, set those aside — then go out and use it! There are so many ways you can benefit from a bonus, including adding more to a retirement account, or taking that vacation you’ve been putting off.