Is your bonus taxed more? Let’s dig into this FAQ.

Fee-only financial planner, Linda Rogers

I have clients all the time express their frustration that their bonus is, in their mind, is "taxed at a higher rate".

Bonuses are considered wages and are taxed the same way as other wages. The IRS does not tax your bonus higher. So where does this confusion come from.

Even though bonuses are taxed the same, the IRS does give different instructions on how employers should withhold taxes for bonuses. Many times what I see is that the bonus has taxes withheld at a flat rate of 22%. That is what is happening.

It can a little more complicated than that, the employer does have options, but that is what I see most of the time - people get a separate bonus check, they are subject to this flat 22% withholding, and they are upset because it looks high.

What you withhold for taxes is a prepayment.

It is not what you actually owe in taxes. If you withhold too much because of this bonus situation,  you will get a refund.

So don't be frustrated with your employer or try and change the way your bonus is paid out, you are misunderstanding what is happening. Take the bonus and be grateful for the bonus.

Check with your tax person if you get bonuses ever year and you feel like you are overwithholding and want to plan for a different outcome next tax season. 

Linda Rogers, CFP®, EA, MSBA is the owner and founder of Planning Within Reach, LLC (PWR). Originally from New Jersey, Linda services clients throughout San Diego county and nationwide. She leads the design of PWR's investment portfolios which utilize broad, low-cost investments that integrate environmentally, socially, and governance (ESG) factors.

Planning Within Reach, LLC (PWR) is a fee-only and fiduciary wealth management firm offering one-time comprehensive financial planning and ongoing impact-focused investment management in San Diego and nationwide. PWR is a woman-owned firm that specializes in busy professionals and impact investors. Planning Within Reach, LLC and their advisors do not receive commissions and do not hold any insurance licenses or brokerage relationships.