Why Are Bonuses Taxed so High?


Quick Answer

Bonuses are taxed at high rates because the money raises your tax bracket and is taxed at the higher rate during that pay period. Alternatively, the Internal Revenue Service allows your employer to withhold a flat rate on the bonus for taxes.

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Full Answer

In many cases, employers add the bonus to the regular wages and use this amount to withhold taxes. As of 2014, the Internal Revenue Service wage tax brackets range from 0 percent to 39.6 percent based on an individuals income and marital status. If an individual's wages are normally in the 15 percent tax wage bracket and she receives a bonus, the extra income may increase her earnings to the 25 percent tax wage bracket. In this case, her wages and bonus for that pay period will be taxed at a rate of 25 percent.

The Internal Revenue Service allows employers to withhold tax on bonuses at a flat rate of 25 percent.

The American Jobs Creation Act of 2004 mandates that if an employee's annual bonuses and supplemental wages, including commissions, payouts for sick leave and prizes, exceed $1,000,000, all supplemental income must be taxed at the highest available tax rate. As of 2014, the highest taxes rate is 39.6 percent.

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