Americans who are receiving a year-end bonus for a job well done may be sorely disappointed when they open their envelope to find a big chunk missing.
Up to a third of a cash bonus can get swallowed up by the IRS’ special tax withholding on cash bonuses, or what it calls “supplemental income,” on top of Medicare, Social Security and state taxes. The federal flat rate for bonus pay is 22% for supplemental income under $1 million. Add Social Security (6.2%), Medicare (1.45%), and state taxes, and total withholding is roughly 30%-35%.
“That 22% federal withholding might be higher than your…regular tax bracket,” according to workforce management software company Homebase. “If they usually pay 12%, seeing 22% disappear from their bonus stings.”
For the holidays, many Americans may have spent like they were receiving the full amount of the bonus instead of the bonus amount minus taxes, said Kevin Knull, chief executive of TaxStatus, which provides IRS data to financial advisers.
The $10,000 bonus for air traffic controllers who had perfect attendance during the government shutdown isn’t really a $10,000 bonus, for instance. The withholding on bonuses is a flat 22%, plus a 6.2% Social Security tax and 1.45% Medicare tax. Those reduce the bonus to just over $7,000, and you may still have to have state income tax taken out.
