Why is bonus taxed at higher rate

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Skip To Main Content. If you itemize your deductions rather than taking the standard deduction, you can make a contribution to a charity to reduce your taxable income.

You may be able to reduce taxes on your bonus to zero by asking your employer to make it a non-financial bonus. Examples of non-financial bonuses could include the ability to work from home or work flexible hours. Not all non-financial bonuses are tax-free, however. If you get extra paid vacation time in lieu of a check, for instance, it can be taxed as a financial bonus.

If your employer delivers the bonus to you as part of your regular paycheck, it will be taxed like regular income. It is usually less costly to have the bonus delivered as supplemental income rather than as an amount added to your regular check. You may be able to get your employer to pay you so the bonus is regarded as supplemental income. However, which approach will result lower taxes depends on your individual situation. Year-end bonuses are subject to taxation just like any income received from an employer.

It's probably that withholding you're noticing on a shrunken bonus check. Employers take taxes from your check in one of two ways:. The percentage method. This is the method your employer will use if, like I did, you receive your bonus money in a check separate from your paycheck. The aggregate method. This is the method your employer will use if your bonus is added on to a regular paycheck. Your employer will withhold tax from your bonus plus your regular earnings according to what you shared with your employer on your W Because you're receiving more money than usual, your employer will withhold more money than usual.

In fact, the IRS provides a handy calculator that figures out the tax withholding on your income, so you can brace yourself ahead of time. Greene-Lewis says that in some cases, depending on your income and tax rate, you might actually get some of this money back in the form of a tax refund.

If your bonus is only a few hundred bucks, there isn't much you can do about the taxes. If you'll receive a considerable amount of cash, though, you have a few options. If you own a home, you can maybe prepay your mortgage and get a bigger deduction, or prepay your property taxes. While some people get their bonuses in January or February, others receive them around the holidays.

If that's the plan for you, and your bonus is big enough to push you into another tax bracket , you can also ask if your company will defer the payment of your bonus to the new year.