I recently received a question from a reader asking why his year-end bonus was taxed so heavily.
My answer: It wasn’t taxed any differently from your regular income. It’s just that the withholding was different.
Bonuses are taxed at exactly the same rate as your normal salary/wage. The difference is that the rules for tax withholding are unique for “supplemental wages” like bonus payments.
Instead of the normal withholding rate, an amount equal to 25% of the payment is withheld for Federal income taxes. (Then the normal amounts are withheld for social security taxes, state taxes, etc.)
So if, for example, you’re in the 15% tax bracket, it’s going to look like an extra 10% of your bonus was taken out for taxes. Fortunately, you’ll get this money back as part of your refund when you file your return.