Some lucky employees have one more reason to celebrate the holiday season. If their employer offers a generous holiday bonus, their bank account can enjoy a boost before year-end. But what does a surprise bonus mean for your next tax filing?
Learn how holiday bonuses affect your taxes as both an employee and an employer. This guide reveals what you need to know about the tax liability of these supplemental wages.
Suppose your employer surprises you by depositing a $1,000 bonus into your bank account. Like your regular paycheck, it’s considered taxable income and may come with a standard withholding rate of 22%.
Some employers combine both an employee’s regular salary and their bonus into one check or deposit. If this happens to you, your supplemental wages would be taxed at the same payroll withholding rate that your employer has on file. Employers who issue bonuses through their routine payroll methods often automatically withhold taxes on these supplemental wages.
Many businesses provide W-2 forms to staff shortly after the holiday season to meet a January 31 deadline. Once you have a better understanding of how holiday bonuses affect your taxes, you can start preparing your taxes in the new year.
Offering bonuses to your employees has numerous benefits. Not only will you make them feel appreciated and valued, but providing holiday bonuses can also boost morale and help retain talented staff. If you plan to issue bonuses to your staff, make sure you keep any tax implications in mind.
The following tips may help you in the process:
Knowing how holiday bonuses can affect taxes, employees and employers alike may wonder whether there are ways to reduce their implications once they file their returns. Thankfully, both parties have a few options for deductions.
As an employee, you could take your gross bonus income and make a year-end contribution to a qualifying retirement account, such as a 401(k). Bear in mind that the IRS dictates how much someone can contribute within a calendar year, so you may need to plan your contribution accordingly. You could also pay it forward by donating funds to a qualifying charity, which could make you eligible for a tax deduction.
Business owners, on the other hand, could explore alternatives to bonuses. You might choose to thank your staff with a holiday party and dinner, or take advantage of other popular deductible business expenses. By going this route, you and your employees may be able to minimize certain tax implications while still showing that you appreciate their hard work.
Now that you know how holiday bonuses affect your taxes, you can prepare accordingly. Whether you’re an employee receiving a surprise bonus or an employer planning to provide additional year-end compensation, Levy & Associates has the resources to help. Our tax consultants help clients make sense of withholding rates, IRS penalties, and other complicated tax issues.
Contact us today to learn how we may be able to help with your upcoming filing. Submit our convenient online form or call (800) 829-5389 for more information.
Levy & Associates is available for free initial consultations. We’re happy to answer any questions you have about the audit process or address any concerns about your specific situation.
There’s never a good time to be audited, and the time-consuming process will take away from your business or family if you try to face it alone. Let us handle and coordinate communication, so you can return to your daily life.