How Is Bonus Income Taxed?

 

Flat Rate Method

• Employers may tax all bonuses using a flat tax rate. In 2011, the tax rate is 25 percent of any bonus of less than $1 million. If the bonus is more than $1 million, employers must deduct taxes of 35 percent using this method. Therefore, if you receive a bonus of $400, your employer must withhold taxes of $100 from your bonus and forward those taxes to the federal government to cover your half of payroll taxes.

Aggregate Taxes

• If your employer adds your bonus to your regular paycheck rather than giving you a separate bonus check, she must use the aggregate method. That is, instead of withholding payroll taxes from your bonus check based on the current flat rate, she withholds taxes on the entire amount of your check based on the payroll taxes for the entire amount. So, if you have a large bonus, you will pay hefty payroll taxes on it if your employer uses this method.