--- title: How Do Taxes Work With Bonuses? description: FocusPay Solutions provides clients with the federal and state taxes associated with a year end bonus. image: https://info.machen.cpa/hubfs/Bonus%20-1224741810-1.jpeg --- [Family of Services](http://machenmcchesney.com/about-us/family-of-companies/)  |  [CPA & Business Advisory](http://machenmcchesney.com)  |  [Payroll, HR & Benefits](http://focuspaysolutions.com/)  |  [Wealth Management](http://machenmcchesney.com/services/financial-planning-and-wealth-mangement-services/) Auburn-Opelika (334) 887-7022 | Montgomery (334) 244-8900 [![mm-cobrand-fd-blues](https://info.machen.cpa/hs-fs/hubfs/mm-cobrand-fd-blues.png?width=279&height=100&name=mm-cobrand-fd-blues.png)](http://machenmcchesney.com) Search this site on Google Search Google Search this site on Google Search Google - [Client Portal](https://machenmcchesney.sharefile.com/Authentication/Login) - [1040 Electronic Organizer](https://www.my1040data.com/account/login/HT7902990) - 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However, both owners and employees often misunderstand how taxes work with bonuses, leading to confusion and frustration. Fortunately, with some education and preparation, the situation can work out for everyone. In brief, bonuses are income and are subject to relevant federal and state taxes — including FICA. Businesses must enter any bonuses on their employees' Form W-2s. However, when it comes to federal income taxes, the withholding is different from the regular paycheck. The IRS allows two withholding methods. If the bonus is separate from the regular paycheck, an employer will typically use the percentage method, which means the 22% rate applies to everyone. This is an easy system for the employer. However, employees who are in a higher bracket may thus find that too little was withheld, and they will owe money. Those in a lower bracket may find too much withheld, leading to a refund. The aggregate method is more complex for the employer but may lead to a more accurate withholding: The employer combines the bonus into a regular paycheck and calculates the withholding as usual, based on the employee's Form W-4. Of course, employees are sometimes careless about updating this form, which may mean too much or too little is withheld. So it's always a good idea for companies to remind employees to review their Form W-4 information annually. **Still more special rules** Those are the basics, but other special rules may apply to further complicate the situation: 1. Extra-large bonuses. In some businesses, top employees may receive a seven-figure bonus. In this case, a higher withholding will apply. 2. Incentive plans. These are common in the automotive industry and, in rare exceptions, are listed on Form 1099-MISC instead of Form W-2. No taxes are withheld, but employees still have to report this as income. 3. Delayed bonuses. Some employees may be better off from a tax perspective by taking a bonus in the following year. The company can agree to do this, but this doesn't eliminate any tax; it just postpones it. Recipients should work with a tax professional to make sure this is a prudent strategy. 4. Sending the bonus straight to the retirement plan. Employees who haven't reached the maximum contribution limit can put some or all of their bonus into a 401(k) plan, for example, reducing taxes and reaching a savings goal faster. 5. Making sure a bonus really is a bonus. Although money is taxable, other items of value, although called "bonuses," may not actually be taxable. Seasonal gifts, occasional sporting or concert tickets, and various minor fringe benefits may not be subject to tax. The line can be thin, however, so be careful. The bottom line? Both companies and employees should work with tax professionals, so bonus time is a happy time for everyone. **For additional information on [employee benefits administration and management](https://focuspaysolutions.com/services/benefits/?__hstc=31761121.6de975eee04bf28563fdf1daa415e270.1659647291102.1665757346179.1665766159541.88&__hssc=31761121.4.1665766159541&__hsfp=3478022145),** **please contact Murry Guy, CPA, by calling (334) 321-4729 or by leaving us a message below.**      Copyright 2022  Topics: [Payroll, HR & Benefits](https://info.machen.cpa/blog/topic/payroll-hr-benefits) Search this site on Google Search Google ### Recent Posts ### Subscribe to Blog ### Posts by Category - [Business Tax (356)](https://info.machen.cpa/blog/topic/business-tax) - [Business Advisory (238)](https://info.machen.cpa/blog/topic/business-advisory) - [Payroll, HR & Benefits (124)](https://info.machen.cpa/blog/topic/payroll-hr-benefits) - [Audit & Assurance (113)](https://info.machen.cpa/blog/topic/audit-assurance) - [Accounting & Outsourcing (81)](https://info.machen.cpa/blog/topic/accounting-outsourcing) - [Individual Tax (75)](https://info.machen.cpa/blog/topic/individual-tax) - [Tax Planning (33)](https://info.machen.cpa/blog/topic/tax-planning) - [Tax Updates (25)](https://info.machen.cpa/blog/topic/tax-updates) - [Retirement & Wealth Management Planning (18)](https://info.machen.cpa/blog/topic/retirement-wealth-management-planning) - [Taxation (15)](https://info.machen.cpa/blog/topic/taxation) - [Alerts (13)](https://info.machen.cpa/blog/topic/alerts) - [Business Valuation (11)](https://info.machen.cpa/blog/topic/business-valuation) - [News & Events (11)](https://info.machen.cpa/blog/topic/news-events) - [Tax News (11)](https://info.machen.cpa/blog/topic/tax-news) - [Individual Tax Planning (10)](https://info.machen.cpa/blog/topic/individual-tax-planning) - [Not For Profit (10)](https://info.machen.cpa/blog/topic/not-for-profit) - [Retirement Planning (9)](https://info.machen.cpa/blog/topic/retirement-planning) - [Estate Planning (8)](https://info.machen.cpa/blog/topic/estate-planning) - [Manufacturing Industry Insights (7)](https://info.machen.cpa/blog/topic/manufacturing-industry-insights) - [Individuals (1)](https://info.machen.cpa/blog/topic/individuals) - [Insider (1)](https://info.machen.cpa/blog/topic/insider) - [Professional Standard News (1)](https://info.machen.cpa/blog/topic/professional-standard-news) see all [![Returning\_Value](https://info.machen.cpa/hs-fs/file-2504250850-jpg/Machen-Blog-Image/Returning_Value.jpg)](http://machenmcchesney.com/about-us/mission-and-values/) - [![AICPA](https://machenmcchesney.com/img/logos/aicpa.jpg)](https://www.aicpa-cima.com/) - [![NACVA](https://machenmcchesney.com/img/logos/nacva.jpg)](http://www.nacva.com/) - ![2026 INSIDE Public Accounting Top 400](https://machenmcchesney.com/img/2026-ipa-top-400.jpg) - ![2026 Best of Auburn-Opelika](https://machenmcchesney.com/img/2026-best-of-auburn-opelika.jpg) - [![2025 Best of OA](https://machenmcchesney.com/img/2025-best-of-oa.jpg)](https://oanow.com/exclusive/readerschoice/ballot-2025/) - ![2026 Best of OA Winner](https://machenmcchesney.com/img/2026-best-of-oa-winner.jpg) - [![2025 Accounting Today Regional Leaders](https://machenmcchesney.com/img/2025-accounting-today-regional-leaders.jpg)](https://www.accountingtoday.com/) - [![ClearlyRated Best of Accounting](https://machenmcchesney.com/img/2024-best-of-accounting.jpg)](https://www.clearlyrated.com/accounting) - [![ClearlyRated Best of Accounting Employee](https://machenmcchesney.com/img/2024-best-of-accounting-employee.jpg)](https://www.clearlyrated.com/accounting) 1820 East University Drive, Auburn, AL 36830 | Tel: (334) 887-7022 | Fax: (334) 887-7221 1761 Taliaferro Trail, Montgomery, AL 36117 | Tel: (334) 244-8900 | Fax: (334) 364-0927 † This is not a CPA firm. \* Assurance, attest, and audit services provided by Frazier & Deeter, LLC. “Frazier & Deeter” is the brand name under which Frazier & Deeter, LLC\* and Frazier & Deeter Advisory, LLC† and its subsidiary entities provide professional services. 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