The Method Bonuses Are Taxed Can Create a Hefty Tax Liability

Many employers give a bonus check to their employees that is separate from their regular wages.

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A bonus is a welcome bump in pay that happens as a reward for doing a good job. But it’s not free money; it’s taxed. Bonuses are considered supplemental wages and are sometimes taxed at a different rate than ordinary income.

How your bonus is taxed depends on the employer. And the taxation method can cause a large tax liability if you aren’t careful.

Employer Must Withhold Taxes From Bonus

Bonuses are classified by the Internal Revenue Service as “supplemental wages.” And just like your employer holds back a portion of your regular paycheck for taxes, they also must take a percentage of the bonus.