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Potential Tax Consequences of Holiday Bonuses

by
Bob Mason
on
12/14/2016
Potential Tax Consequences of Holiday Bonuses

Potential Tax Consequences of Holiday Bonuses  

It's the season for giving and, if the year has been fruitful, you're hopefully getting a nice bonus from your employer. But as much as you're looking forward to having your bonus to help out with holiday gifts and travel, you need to keep in mind that there can be some potential tax consequences in store. The tax man can take a huge bite out of your bonus just like snapping a tasty gingerbread man's head off.

Additional Taxes Taken Out of Holiday Bonuses

  • Federal income tax: Bonuses are considered "supplemental income" with their own federal withholding rate (25%) regardless of how much you regularly have taken out of your paychecks. Depending on how your employer configures payroll, your bonus payment may be calculated separately from your regular paychecks and have 25% automatically withheld in federal income taxes. If that's not the case, your withholding rate as of your last paycheck will be used. However, depending on how much you earn and what deductions you take, your actual tax rate may be lower than 25% so chances are that you may get some or all of the 25% withheld when you file your tax return.
  • State and local income tax: Most states impose an income tax on wages, salaries, and other earned income except for Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming, New Hampshire, and Tennessee. Your county and/or city may also require taxes that your bonus will be subject to based on where you live and work.
  • Social Security tax: You and your employer share responsibility for paying Social Security taxes, each paying 6.2% on your gross pay up to $118,500 for 2016. If you earned close to or more than $118,500 pre-tax in 2016, your payroll provider may accidentally over-withhold Social Security taxes on your bonus. This can also happen if you change jobs mid-year. However, you can get the difference on the Social Security cap back as a tax credit when you file your return.
  • Medicare tax: This is a flat tax with no cap. Regardless of how much you earn, you and your employer have to pay a flat 1.45% tax for Medicare whether or not your earnings surpassed the Social Security cap.

Did You Accidentally Receive a 1099 For Your Holiday Bonus When You Normally Receive a W-2?

If you are not freelancing or receiving any other non-employee compensation from a company, then all of your earnings should be reported on your W-2 form. However, many employers who aren't that adept with payroll administration (or who don't report bonuses to their outsourced payroll providers until it's too late to do so) may issue you a 1099-MISC form to report your bonus. This is an honest mistake but one that employers aren't supposed to make. If you don't address this issue right away, it can give you an unwanted headache when the time comes to file your tax return.

If you received a payment with no taxes taken out and a 1099 tax form for your holiday bonus, you need to file IRS Form 8919 and pay your applicable share of Social Security and Medicare taxes (6.2% up to $118,500 and 1.45% regardless of amount, respectively) but you do not need the pay both the employee's and employer's as if you were self-employed. There are additional federal, and possibly state and local, payroll taxes that your employer must pay in relation to your bonus, so it's important to file this form and tell payroll right away. 

However, if payroll issued you a second W-2 form correctly reporting your bonus with withholding done at either your normal rate or the 25% supplementary income rate, then you have nothing to worry about. You simply report both W-2s on your tax return, and it will compute the same as if they were reported on the same form.

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Bob Mason

Bob Mason

Bob Mason is the founder of Coast Financial Services Inc. servicing both the Santa Cruz, and San Jose areas. Bob Mason is a skilled financial professional who is fully equipped to assist any of your accounting needs. Founding his firm in Santa Cruz, Bob understands the importance of small businesses and how they form the backbone of the area. Coast Financial Services, Inc. has been dedicated to the growth and profitability of businesses in Santa Cruz for 17 years. To learn more about Bob Mason and the rest of his team, visit their website.

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