Texas is one of fewer than a dozen states that do not impose state income taxes on its residents. Residents who receive bonuses from their employers are not subject to personal state income taxes, but they are subject to federal income taxes. Nonresidents may be required to pay income taxes on their bonuses to their home states.
As of 2011, fewer than a dozen states, including Washington, Alaska and Wyoming, did not impose state income taxes. However, Texas residents are subject to over 60 other types of taxes, including franchise taxes, sales and use taxes and inheritance taxes. Because Texas does not impose state income taxes on its residents, employees who receive performance bonuses from their employers will not pay state income taxes on their earnings.
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Federal Income Taxes
The U.S. Bureau of Labor Statistics reported that the national unemployment rate for August 2011 was still over 9 percent. For Americans fortunate enough to find employment, receiving a performance bonus is often unexpected. The Internal Revenue Service treats bonuses as supplemental wages and requires employers to withhold supplemental wage taxes on them.
Texas residents who receive bonuses from their employers are not subject to personal state income taxes, but they are subject to federal income taxes.
Bonus earnings are subject to employment taxes, including Social Security, federal unemployment taxes and Medicare taxes. Because employers are required to withhold employment taxes on each of their employees' paychecks, they must also withhold employment taxes from employees' bonus checks.
Bonus Tax Rate
The IRS requires employers to withhold a quarter of an employee's performance bonus for federal income taxes. Because employers are required to withhold about 15.3 percent of an employee's pay for federal employment taxes, and they are required to withhold a flat tax of 25 percent on an employee's paycheck, the total withholding is over 40 percent for bonuses.
However, although employers are required to withhold 40.3 percent of an employee's bonus check for federal income taxes, an employee's final tax liability depends on his individual tax liabilities. For instance, an employee in a lower federal tax bracket may receive a refund on her bonus withholdings.
Texas employers are required to withhold 40.3 percent of an employee's bonus as his federal income tax responsibility. Furthermore, nonresidents who work in Texas may be required to pay state income taxes on their bonuses if their states impose income taxes. Because the Texas Comptroller of Public Accounts does not impose state income taxes, Texas does not participate in reciprocal income tax agreements with other states.
- IRS.gov: Publication 15-A (2011), Employer's Supplemental Tax Guide
- Federation of Tax Administrators: State Individual Income Taxes
- IRS.gov: Publication 15 (2011), (Circular E), Employer's Tax Guide
- Bureau of Labor Statistics; Economic News Release; July 2011
- Texas Comptroller of Public Accounts: Overview of Texas Taxes
- IRS.gov: Publication 17 (2010), Your Federal Income Tax