In this article, we will discuss how bonuses are taxed. We will explain the taxes imposed on bonuses and how to calculate them. We will also address potential differences in local and state taxes in New York City.
What are bonuses and how are they taxed?
Bonuses are considered additional income received by employees in addition to their base salaries. Bonuses are subject to a tax rate of 22%, and this rate may be lower than the tax imposed on regular income, depending on the individual’s current salary. This rate remains until the total bonuses reach one million dollars. After that, a higher income tax is imposed on bonuses at a rate of 37%.
Employers have two options to impose the appropriate tax: either deduct 22% from the bonuses (the percentage method) to send to the tax authorities, or treat them as regular income (the aggregate method) and impose tax at the regular income tax rate. However, there is a complication, as the employer must combine the bonuses with the regular salary for this to work.
In my personal experience, many jobs follow the second option and treat bonuses as regular salary. You may notice that when you receive a bonus, the tax withheld is more than you expected. The reason for this is that you are receiving a larger amount of money compared to what is usual, so more tax will be withheld than normal. However, it is still an additional salary that should be taxed at only 22% (provided the bonuses are less than one million dollars). Therefore, if a higher tax is withheld, you may be eligible for a tax refund when filing your tax return in the following year, as long as you have not paid lower taxes elsewhere.
Local and State Taxes in New York
Local taxes in New York affect bonus income at a rate of 11.7%, and New York City will take its usual share of taxes. However, for readers living in other states and cities, they should check their local government tax regulations to see how taxes affect them.
Conclusion
It’s great that you have been able to negotiate bonuses for your team, but don’t stop fighting for higher base salaries. Unless the employer commits to providing these bonuses regularly, they will disappear after distribution, and it seems that your team truly wants to be fairly compensated. The only real way to achieve this is to ensure that their regular and consistent income reflects their actual value.
Good luck!
Source: https://www.thebalancemoney.com/how-bonuses-are-taxed-on-your-paycheck-5221180
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