A large number of companies provide their employees with holiday bonus or end of the year bonus. In fact, a study states that about 80% of the companies do this. It always feels good when you are at the receiving end of such gifts and bonus, doesn’t it? But do not forget the tax liability that might arise out of these bonuses.
A check or cash bonus paid by your employer is one of the most common forms of holiday bonuses. If you are part of an organization where you are entitled to such benefits, you need to list it out.
The bonus amount needs to get into your Form W-2 that you will most likely receive in the month of January. Any cash bonus is treated in the same way as wages. Thus, the taxes that the bonus attract is the same as wages do. You must declare the same in your Form 1040 in line 7 as wages.
If your employer provides gift cards instead of straight off cash, IRS treats it in the same manner as a cash bonus. The gift card you received, would then be taxed in the same way as your wages.
It is also essential that you understand the withholding rules. Because the amount of taxes that you owe large depends on the same.
Under most circumstances, the bonus will be taxed at the same rates as wages, but there are certain exceptions. For an instance, if you receive the bonus separately from your salary or wages, it will be taxed separately. If you have received a bonus of $1 million, the taxes will be different.
The bonus that you receive from your employer falls under either of the following categories. Thus, you can deduce for yourself the tax liability.
Less Than A Million
For all individuals whose bonus amount is less than $1 million, the tax liability depends on how you receive the funds.
Should your employer decide that the bonus would go as a part of your wages or salary, the taxes that apply to your wages would hold good. You might have to pay a higher amount of taxes if the combination of your wages and bonus exceeds the tax bracket you belong to.
If your employer pays you the bonus or gift card separately from your regular paychecks, it would attract a flat tax rate of 25%. Thus, your employer has a key role to play when it comes to taxation on bonuses.
Irrespective of either of the above, if you have or anticipate bonus from your employer, be ready to shell out a bit higher amount of taxes.
More Than A Million
If you are part of this exclusive group that receives a bonus of $1 million or more, the same would be taxed at 39.6% flat.
How To Report?
Bonus amounts almost always receive a tax treatment that differs from your wages. However, it should be part of your W-2 Form.
In the event of your employer declaring the same in 1099-MISC, make it a point to correct the same. It must go in your Form W-2.
Some employers do not entertain modifying or correcting the above, in such cases also you should report the bonus appropriately. You would need to fill the line 7 of your Form 1040 under 1099-MISC and provide Form 8919 which would show that you haven’t collected your Social Security or Medicare tax.
Should your bonus include items such as ornaments, weekend getaways, or a holiday package, you are not liable to pay any taxes. Such gifts come under the category “de minimis fringe benefits”.
Have a question? Contact Nanda Kumar.
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