What are bonus tax brackets?


Quick Answer

Bonus tax brackets are set up by the IRS to tax work bonuses, also called supplemental wages, according to Huffington Post. All forms of compensation from an employer are taxed, which includes annual or quarterly bonuses.

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Full Answer

The bonus tax brackets are calculated by the employer, notes Huffington Post. The employee will see the after-tax amount on their paycheck containing the bonus. This is because the IRS views money considered supplemental wages to be different than traditional wages. The bonus tax bracket is often different than normal wages with a different percentage taken out for taxes.

Some examples of bonuses that are calculated as supplemental wages are severance pay, overtime, moving expenses and vacation pay, says Huffington Post. The two main methods of calculating the taxes to be taken out of the bonuses are the percentage method and aggregate method. With the percentage method, the bonus gets 25 percent taken out for taxes as a flat rate. This means if the bonus was $5,000, $1,250 is taken out of the paycheck.

With the aggregate method, it is based on the individual's tax bracket, which depends on his income, states Huffington Post. Instead of being taxed differently with the aggregate method, regular waxes and bonuses are combined to figure out the correct tax bracket.

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