Do you have a Bonus paycheck coming up?
Don’t forget about taxes!
Be sure to check your tax withholding on your W-4 form.
The W-4 Form is an IRS document you complete for your employer to determine how much should be withheld from your paycheck for federal income taxes.
In some cases, the tax withheld from bonus income could be more than the tax withheld from your regular pay… Sometimes the IRS withholds tax on your bonus income by applying your regular tax rate to your combined salary and bonus income.
If that’s the case, combining your salary and bonus could put you in a higher withholding bracket, causing the tax allocated to your bonus to actually be higher than the regular rate!
Changing your tax withholding for a pay period is always an option, but you should make sure that you have the right information to ensure that your reporting goes as smoothly as possible.
The withholding on the W-4 affects your entire paycheck, not just the bonus.
For people who regularly get tax refunds it may make sense to adjust your W-4. You can avoid giving the government a 1-year interest free loan with your tax refund. But be careful, if you fail to change your allowances back, you could have insufficient withholding at year end.
One of the most effective ways to reduce taxes on a bonus is to reduce your gross income with a contribution to a tax-deferred retirement account. This could be either a 401(k) or an individual retirement account (IRA).
You can adjust your contribution as a % or a flat dollar amount.
The IRS Withholding Calculator on the IRS website is a great resource to estimate the number of allowances you should claim.
The calculator asks for an estimate of the federal income tax withheld from your pay to date, including bonuses.
If the calculator results show you should adjust your W-4 allowances, you’ll see a message with the number of allowances to claim on line 5 of your W-4.
You can checkout the calculator here-> https://www.irs.gov/individuals/tax-withholding-estimator