The holiday season gives you plenty of reasons to celebrate, primary of which is the bonus that you will receive close to the end of the year. Unfortunately, the figure you expect might be not be what you will get, especially after the taxman had his way. The IRS takes a huge chunk of your bonus, which is really frustrating and disheartening. You deserve the full amount of your bonus, after all.
So what happens in between?
According to tax experts, your bonus is categorized as a “supplemental income”, which is held at a higher withholding rate than any of your regular income. This explains a lot of things, right? But there could be instances when the tax deduction doesn’t hurt as much. It all depends on how taxes are taken from your check.
If the percentage method is used, you would not hurt as much, since your company would simply tax your bonus at a flat rate of 25%. But this would only work if your bonus money is given to you in a check separate from your monthly pay. In this case, companies use the percentage method to avoid complications on their end.
However, if your bonus is added on top of your regular paycheck, the aggregate method will be used. Because you receive more than what is indicated on your W-4, your employer will also increase the withholding rate. This means that your tax deduction can double, causing the amount to shrink significantly.
It’s heartbreaking, yes. But you can’t ask your employer to choose the lesser evil between the two methods, or wish you would not be given any amount of bonus. The best thing you can do out of the situation is to get tax breaks from other means. You can donate to charity or prepay your mortgage or taxes and get deductions from there. Sure, you won’t be able to enjoy your bonus as much as you would like to, but at least you can pinch back the taxman.