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Yahoo
4 days ago
- Business
- Yahoo
Bonus tax rate 2025: How bonuses are taxed
When you get a bonus — or other supplemental wages, such as severance pay, commissions, etc. — your employer must withhold some of the money to send to the IRS for taxes. Your employer may withhold 22 percent of your bonus for taxes (37 percent for any bonus amount above $1 million), or your employer may withhold taxes at the same rate as they do for your paycheck. Bonuses can be a welcome bump in pay, but the difference between what your employer promises you and what you actually receive can be startling. That's because your employer must withhold taxes from your bonus — and those taxes can take a big bite. Employers have two options for how much tax to withhold on bonuses: They can apply a standard 22 percent rate, or they can treat the bonus as part of a regular paycheck, and use a similar withholding rate. The good news? If too much is withheld from your bonus, then you should receive a tax refund when you file your tax return. Learn more: The average tax refund each year, and how tax refunds work The IRS generally classifies bonuses as 'supplemental wages.' Other types of supplemental wages include severance pay, commissions, and awards and prizes. Just as your employer holds back a portion of your regular paycheck to pay your taxes, it must take money out of your bonus check, too. These funds are sent to the IRS on your behalf. (This process is known as tax withholding, and you can control your withholding rate by how you fill out your Form W-4.) Supplemental wages are subject to either a flat 22 percent federal withholding rate or a withholding amount based on your marginal tax rate. Your employer chooses which withholding method to use. Here's how it works: Employers are allowed to calculate tax withholding on your bonus in one of two ways — the percentage method or the aggregate method. The percentage method, also called the flat rate method, is the easiest way for employers to calculate taxes on a bonus. With the percentage method, the employer identifies the bonus as separate from your regular wages. The withholding rate for supplemental wages is 22 percent. That rate will be applied to any supplemental wages, such as bonuses, up to $1 million during the tax year. If your bonus totals more than $1 million, the withholding rate for any amount of the bonus above $1 million is 37 percent. Below are two examples of how the percentage method works. Example 1: Bonus amount $10,000 Federal tax $10,000 X 22% = $2,200 federal income taxes withheld Remaining bonus $7,800 Example 2: Bonus amount $1.5 million Federal tax $1 million X 22% = $220,000; $500,000 X 37% = $185,000$220,000 + $185,000 = $405,000 federal income taxes withheld Remaining bonus $1,095,000 Note: If your supplemental wages for a year total more than $1 million, your employer must use the flat rate method and calculate your bonus withholding over $1 million at 37 percent. Need an advisor? Need expert guidance when it comes to managing your money? Bankrate's AdvisorMatch can connect you to a CFP® professional to help you achieve your financial goals. Sometimes employers pay bonuses alongside regular wages. In this situation, your employer must use the aggregate method to calculate the tax withholding on your bonus. With the aggregate method, the tax withholding on your bonus is calculated at your regular income tax rate. The withholding rate is based on your tax bracket. Often, when taxes on wages plus bonuses are calculated together this way, the total amount of tax withheld is higher than if the employer used the percentage (or flat rate) method described above for the bonus. Imagine your typical monthly salary is $6,000. Your tax withholding would be based on an annual salary of $72,000 ($6,000 X 12). That income amount would put you in the 22 percent federal tax bracket, assuming you file your tax return as single or head of household. (That 22 percent rate is your marginal or top tax rate.) Continuing with this example, let's say that in November your employer pays you a bonus of $10,000. The employer gives it to you alongside your regular $6,000 monthly salary but identifies it as a bonus. Your income climbs to $16,000 for that month. Using the aggregate method, your employer would multiply $16,000 by 12 months. This would cause the tax withholding on your bonus to be calculated as if you were earning $192,000 per year, bumping you up to the 32 percent tax bracket. The employer would subtract the taxes already withheld from your last paycheck and take the remainder out of your bonus amount. Learn more: Marginal vs. effective tax rate: How they differ and how to calculate each rate The IRS will expect its cut of any bonus you receive. Even if you receive your bonus in cash, gift cards, a vacation or some other benefit, you'll generally have to pay taxes. The exception to this rule is if your bonus can qualify as an employee achievement award. You might be able to avoid paying federal income taxes under the following conditions: The award isn't cash, a cash equivalent (such as a gift card or money order), tickets to events, vacations, stocks, bonds or other prohibited items. The award is tangible personal property. The total value of the award doesn't exceed $1,600. The method your employer uses to calculate the federal withholding on your bonus can have a big impact on your take-home pay. Still, you won't know how much you actually owe the IRS until you file your tax return the following year. If it turns out that the tax withholding on your bonus was higher than necessary, you might receive a tax refund for overpayment. On the other hand, if too little money was withheld from your income throughout the year, you could wind up owing the IRS. You can reduce the risk of owing the IRS money by reviewing your Form W-4, which tells your employer how much to withhold from your paychecks. The IRS Tax Withholding Estimator is a useful tool for figuring out exactly how much money you should have withheld for taxes. Also, if you receive a large bonus or your financial circumstances change, it may be best to talk to a tax professional for advice. Learn more: 5 tips to find the best tax preparer for you Want to lower the amount of taxes withheld from your bonus? Consider asking your employer to pay your bonus separately from your regular paycheck, and to calculate your tax withholding at the 22 percent flat rate the IRS allows for supplemental wages. Another strategy is to stash your bonus into a pre-tax account such as a 401(k) or IRA (assuming you haven't hit the contribution max for that account). The taxes will already have been withheld before you can make that contribution, but you should receive that money back as a refund at tax time. Using a pre-tax account shields the bonus from being counted in your taxable income in the current year. (You will, however, owe income tax on money you withdraw from those accounts in retirement.) The IRS considers bonuses to be 'supplemental wages.' A supplemental wage is money paid to an employee that isn't part of his or her regular wages, according to the IRS. In general, bonuses of any kind, including signing bonuses and severance pay, fit into the supplemental wages category. Examples of supplemental wages include, but aren't limited to: Bonuses. Certain commissions. Overtime pay (employer can choose to categorize as supplemental or regular wages). Accumulated sick leave. Severance pay. Prizes and awards. Back pay. Reported tips (employer can choose to categorize as supplemental or regular wages). Retroactive pay increase. Payments for non-deductible moving expenses. Tax refund schedule: How long it takes to get your tax refund Short-term vs. long-term capital gains Trump's tax plan: The 'big, beautiful' bill heads to the Senate Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Yahoo
16-05-2025
- Business
- Yahoo
George Kamel: 6 Reasons You Paid More Taxes This Year (and What You Can Do About It)
During tax season, you probably expect to owe nothing extra or even receive a nice refund that helps you catch up financially. But if you were unlucky when you filed your 2024 tax return, you might have gotten a surprise IRS tax bill that left you wondering what happened. Read Next: Explore More: In a recent YouTube video, George Kamel discussed six reasons you might have owed more taxes this year. He also spoke with tax lawyer Jasmine DiLucci about ways to avoid shortages next time. A bigger tax bill often comes from changes to your income. A raise or promotion may have led to a higher tax rate. Or you might have joined the roughly 8.9 million Americans who worked multiple jobs, as reported by the U.S. Bureau of Labor Statistics. These situations can lead to your employer not taking enough taxes out of your pay. Both Kamel and DiLucci recommended going to your employee portal or asking HR about updating your Form W-4, which asks questions about your tax situation and lets you adjust how much money is withheld. You can also use the IRS tax withholding estimator to figure out the right amount. When you update your Form W-4, keep in mind that Kamel advised aiming to have a tax balance of zero. While they're a nice surprise, refunds aren't necessarily a good thing for your money. 'If you're getting a refund, it's because you've been overpaying and essentially loaning your money to the government interest-free,' he said. Be Aware: Losing tax breaks or qualifying for lower amounts can cut into your refund or leave you owing money. Kamel gave the example of Child Tax Credit, which was $3,600 for children under 5 in 2021 compared with $2,000 in 2024. Other scenarios include losing education credits if you completed school, getting a smaller Earned Income Tax Credit because your income went up or not qualifying for the Saver's Credit if you didn't contribute to your retirement account. While you can't do much about some lost or reduced tax perks, Kamel and DiLucci discussed how deciding between an itemized and standard deduction is important for saving money. DiLucci said the standard deduction is usually better unless you've got high mortgage interest and/or high charitable deductions. 'If you got married or divorced, both of those things can change your filing status and your taxable income, and if you sold your home, you may owe taxes depending on how long you lived in the house, your profit from the sale and your filing status,' Kamel said. If you stop qualifying for the married filing jointly status, your standard deduction is smaller, and you could find yourself in a higher tax bracket. But if you have a qualifying child, check if you can file as head of household since this is more favorable than filing single. Before future property sales, check the IRS rules on capital gains taxes. Meeting certain requirements can exempt up to $500,000 of your house's profit from those taxes. DiLucci said some people aren't aware that there's a $400 threshold for self-employment taxes or that this type of income is reportable. Since it's your job to pay taxes on self-employment earnings, a big tax bill is possible if you don't follow the rules. 'To avoid any potential penalties and fees, it's best to just pay it quarterly through the IRS website,' Kamel said. Even if it's just a small side hustle, track all your earnings and expenses and use Form 1040-ES to figure out what to pay the IRS each quarter. According to Kamel, taking money out of a traditional retirement account could also cause a larger tax bill. 'This would be now taxed as income,' he said. And if you have a regular brokerage account, taxes on gains might have increased your 2024 tax bill. The impact can be bigger if those investments were less than a year old; normal income tax rates rather than lower long-term capital gains rates would apply. It's smart to speak to a tax expert or investment advisor who can help you time withdrawals and sales and find other ways to lower your investment taxes. Tax mistakes do legitimately happen. Maybe you typed the wrong income amount or forgot an eligible tax credit or deduction. DiLucci also mentioned that transactions on platforms like Venmo can lead to a 1099-K issuance and an unexpected tax bills if the money is assumed to be income. DiLucci explained that if it's not income, you'll need to disclose that. 'You actually need to typically report it on your return, reverse it out and disclose that it's not income. Otherwise, the IRS will put it on your return as income,' she said. Looking into tax rules, double-checking everything and working with a tax professional can help you avoid costly troubles. More From GOBankingRates What $1 Million in Retirement Savings Looks Like in Monthly Spending Mark Cuban Tells Americans To Stock Up on Consumables as Trump's Tariffs Hit -- Here's What To Buy 5 Little-Known Ways to Make Summer Travel More Affordable 5 Types of Vehicles Retirees Should Stay Away From Buying Sources George Kamel, 'Why You Paid More Taxes This Year (And What To Do About It)' U.S. Bureau of Labor Statistics, 'The Employment Situation — April 2025.' This article originally appeared on George Kamel: 6 Reasons You Paid More Taxes This Year (and What You Can Do About It) Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Yahoo
24-04-2025
- Business
- Yahoo
4 Paycheck Adjustments To Make Every Spring
Spring isn't only a time for cleaning out your house — it's also a good time for making paycheck adjustments. Your paycheck has important information, but apart from paydays, you may not think about it too often. If you're on autopilot with your paycheck, you may be missing or forgetting about money adjustments worth considering. Don't worry if you aren't sure what you should review or what adjustments you should make. For You: Trending Now: We have a list of paycheck adjustments you can make every spring to help you get started. The income tax withheld from your paycheck is calculated based on your withholding settings. Federal withholding settings consider factors like your filing status, the number of jobs you work and the number of dependents you claim. If your marital status changed in the past year, consider updating your Form W-4 to reflect this. Maybe you didn't get married, but when you filed your income tax return recently, you owed way more than expected. The balance due may be because of incorrect or outdated information on your Form W-4. Taking the time this spring to ensure your withholding settings are up to date can save you a headache when it comes time to file your tax return again. See Next: When you think about your paycheck, your first thought is probably about how much you take home. However, another important thought should be about where your money goes. Most people have their paychecks directly deposited into their checking accounts. Unfortunately, leaving your money there typically doesn't pay well. You likely move funds from your checking account to a savings or brokerage account with higher yield rates. Take time this spring to make adjustments to the amount or percentage you move into either of these accounts to reflect changes to your budget or personal needs. Another place you can allocate your paycheck is to employer-sponsored tax-advantaged savings accounts like a 401(k), health savings account (HSA) or flexible spending account (FSA). Spring is a good time to double-check your contribution percentages to these accounts, as you still have more than half of the year left to build up your contributions or even max them out. Remember, the maximum contribution amounts for these accounts typically increase annually to keep up with inflation and the more you contribute to pre-tax accounts, the less taxable income you have. Typically, the things you need to maintain your lifestyle, like rent, food and transportation, get more expensive each year. Your paycheck should also go up annually to keep up with rising prices. It's a good idea to review your raise when you receive it to see if it measures up to inflation. If you haven't done that, this spring is the perfect time to check. If you realize your rent has gone up more than your raise, consider making adjustments like cutting spending elsewhere or asking for more of a raise to compensate for the difference. Turn off autopilot and consider these paycheck adjustments you can make every spring. More From GOBankingRates Mark Cuban: Trump's Tariffs Will Affect This Class of People the Most 7 Tax Loopholes the Rich Use To Pay Less and Build More Wealth How To Get the Most Value From Your Costco Membership in 2025 How Much Money Is Needed To Be Considered Middle Class in Every State? This article originally appeared on 4 Paycheck Adjustments To Make Every Spring Sign in to access your portfolio
CBS News
21-03-2025
- Business
- CBS News
Can a big tax refund be a bad thing? Experts weigh in.
The deadline to file your taxes is now just weeks away on April 15. Tax experts say the sooner you file, the sooner you get that refund, if you have one coming. The average refund amount this year is more than $3,300, according to the IRS. But while many look forward to that big chunk of money, some argue a big refund isn't always a good thing. After all, tax refunds aren't free money — it's the taxes you overpaid, so you could view it as money you should've had throughout the year. CBS News business analyst Jill Schlesinger told CBS Mornings big refunds are often a result of people giving up too much from their paychecks to taxes. She advises you should make some changes if you get a large refund. "If you get a big refund, one nice thing to do would be, 'Hey, let me change my withholding, let me hold on to my money during the year,'" she said. "Keep your money!" You can adjust your withholding by submitting a new Form W-4 to your employer. The IRS recommends using its online withholding estimator tool to determine how much you might owe or be refunded depending on your withholding amount. The idea is that withholding less frees up money you can instead invest, save in a high-yield account, or use to pay down debt throughout the year. But Jackson-Hewitt Chief Tax Officer Mark Steber warns you could also wind up withholding too little and that can lead to penalties. For that reason, he says most of his clients prefer to bank on getting money back. "Most people with big refunds spend them wisely, most people with an extra 50 bucks in their pocket on Friday, they're not putting that in a managed index fund or a Roth IRA," he said. "They're treating themselves to something nice, which is fine, but I see far more people come in at the desk, they get a zero refund, or worse, they owe $1,500. Much more problematic in their life." Ultimately it's about finding what works best for you. Half of adults surveyed who expected a refund last year said they planned to save some of it, while one-third said they'd use it to pay off debt. The survey was conducted by the National Retail Federation and Prosper Insights & Analytics. E-filing is the quickest way to get your refund. Despite staff cuts at the IRS, the agency says filing electronically and opting to have your refund directly deposited into your account takes about 21 days on average. Within 24 hours of e-filing, you can use to check your refund status with the "Where's My Refund?" tool . If you file a paper return it could take up to four weeks. Do you have a money question, a consumer issue, or a scam story you want to share? Email InYourCorner@
Yahoo
23-02-2025
- Business
- Yahoo
How to create an online account at IRS to get transcripts, make payments, more
The last thing many people want to do is take yet another extra step when it comes to doing their taxes. But the option to create an online account with the IRS could well be worth considering, according to tax professionals. This tax season, the IRS is highlighting improved and expanded features for its online account for individuals, which taxpayers can create at The online accounts are not a requirement, so you can still e-file a return without creating such an account. The biggest selling point: By creating an online account, you can avoid the need to call the IRS for all sorts of questions. You can find answers day or night without having to call the IRS hotline at 800-829-1040. "The world itself is more digital," said April Walker, lead manager for Tax Practice & Ethics with the American Institute of CPAs. Many people are increasingly comfortable paying their bills online, including their tax bills. They'd rather pay online than put a check in the mail. Walker, who set up her own online account with the IRS about five years ago, said it wasn't the easiest process to verify her identity then to set up the account but she was able to do it. More information exists now on though, she said on how to verify your identity to set up these accounts. During the pandemic, the tax filers did experience some difficulties when the IRS "Get My Payment" tool periodically would clunk out. That tool was designed to help people track their coronavirus relief payments and allow taxpayers to provide direct deposit information to receive the Economic Impact Payments more quickly. And about four years ago, many people had complained about having difficulty setting up the online account at because they couldn't get past the authentication process. But that's not the case now, according to tax experts. The IRS has expanded what's being offered through these online accounts, and it could be helpful to many people who do their own taxes and taxpayers who need to make payments. "You don't have to set up an account to be able to make payments," Walker said, "but if you set up an account you can very easily see that your payment was made and that it was applied to your account." In addition, she said, some people who make estimated payments, including retirees and others, lose track of what payments they've already made and they can use the online account to keep better track of what they've paid already. You don't want discrepancies on your tax return, she said, with the amount you think you paid for estimated taxes in 2024 and the amount that the IRS has on record. Someone who is still on the job and receives salaries and wages often is able to avoid going through the hassle of making estimated quarterly payments. If you owe a lot in taxes each year, the IRS notes, you can ask your employer to withhold more tax from your earnings. You'd file a new Form W-4 with your employer. And you can use a special line on Form W-4 to enter the additional amount you want your employer to withhold. Sometimes, the goal is simply to get your tax planning in order — or figure out a new way to make payments. "With the same ease that taxpayers have when banking online or placing an online shopping order, they can log in and get the latest on their payment history, balance, and more," according to an IRS alert about its online accounts last year. Creating the account does take extra work. The IRS requires you to have an account with to access the online account relating to taxes. 2025 tax season: IRS cuts may mean refund delays and long waits. File early before potential cuts, CPAs say To get started, you'd need your photo identification — such as a driver's license, state ID or passport — to verify your identity. And you'd need access to a computer that has a camera to make sure that everything is matching. You might need to update your browser settings. It's best to understand the instructions upfront before you try to create the account. The site has a useful tip sheet online called "IRS and for how to create an account and how to troubleshoot some issues. If you have an account from a state government or federal agency, the IRS notes, you can sign in without a need to sign up again by going through a verification process. Individuals who have already verified their identity with would simply need to login, according to the company, and pass a two-factor authentication process, such as sending a code to your phone. " is a service created, maintained, and secured by a private technology provider," according to a tip on how to create an online account by the Taxpayer Advocate Service. "If you do not have an account, you must create a new account using your online account at says its services offer consumers a way to "securely prove their identity online, expanding digital access while protecting privacy and preventing fraud." The company states online that is "the only digital wallet that meets the federal government standards for secure multifactor authentication." You go to to create an online account for individuals. "The federal government does not have access to data unless an individual provides explicit consent to share certain data elements," according to an spokesperson. does not sell data, according to its spokesperson, and does not share data without the explicit consent of an individual. " role is to ensure the user is who they are claiming to be so the right user is matched to the right records at the right time and to prevent unauthorized access and scams," according to the spokesperson. Right now, many people might be concerned about the privacy of their financial data. The Washington Post, for example, reported that Elon Musk's cost-cutting group is seeking access to a heavily guarded IRS system that provides detailed financial information about every taxpayer, business and nonprofit in the country, according to three people familiar with the activities. USA Today reported that the Department of Government Efficiency is seeking direct access IRS computer systems that have vast amounts of sensitive data. While such news is unsettling, it isn't reason alone to not use an online account. Information that is in a taxpayer's online accounts is already in Internal Revenue Service system, whether your create an online account or not, said Nina E. Olson, executive director of the Center for Taxpayer Rights. "I don't think the account, per se, increases someone's exposure," she said. Once you sign up for an IRS online account, you can see key details that you can use, if needed, to file this year's tax return. You can spot your adjusted gross income from last year's tax return, if you cannot find it. You can access your tax records through the IRS "Get Transcript" tool. Or you can request an Identity Protection PIN. Or you can authorize another person to represent you before the IRS or view your tax records. You also can get account transcripts that include wage and income records. And you can make a payment online, set up payment plan options, or check your balance to see how much you still owe the IRS. The feature also promises to offer expanded alerts to scams and schemes. To be sure, you often are able to get this information through other channels. If you lost last year's return, for example, you can request a transcript by mail if you don't want to go online to and click on "Get Your Tax Record." If you do call the IRS, it's important to know that IRS customer service representatives can't access your online account. "They also don't have the same view as what is shown in online account," according to the IRS. The IRS notes that a taxpayer's balance will update no more than once every 24 hours, usually overnight. And, typically, you'd need allow one to three weeks for payments to show in the payment history. The IRS also notes: "Only the taxpayer should log into their account. Credentials should never be shared with others." Contact personal finance columnist Susan Tompor: stompor@ Follow her on X @tompor. This article originally appeared on Detroit Free Press: IRS suggests making online account for key info, expanded features Sign in to access your portfolio
