How to Report a Bonus on Your Taxes

Salary bonuses are nice -- but also taxable.
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If your employer rewards your work with a bonus, at the end of the year or any other time, for tax purposes he's simply increasing your taxable wages. Bonus income is reported much like regular salary, and the IRS treats it the same as other employment income.

Bonus Income Reported with Regular Income

Any bonus payments from your employer are included in your annual wage statement, IRS Form W-2, which you should receive from your employer. Covering income earned in the prior tax year, the W-2 arrives in January and should be filed along with your other tax forms. There's no separation of bonus income from other types of taxable wages. The employer adds it to this total and enters it on Box 1 of the form.

Reporting and Withholding on Non-cash Bonuses

Not all bonuses are paid in the form of money. If you received some kind of gift or prize for your work, the value of that item is included in your gross wages for the year, and is also taxable. If your employer neglects to withhold taxes for a non-cash bonus, this may kick up the amount of taxes you pay as well as your tax rate as a percentage of your income. To compensate, and avoid a large tax bill, you can request the IRS increase your withholding rate by filing a new W-4 and claiming fewer tax allowances.

Taxation of Stock Bonuses

If you receive stock as a bonus, tax is owed on the fair market value of the shares at the time you received them. If the shares don't "vest" immediately, and you have to wait to claim their full value, then the tax is deferred. As an employee, you can also make an "83b election," which means you choose to pay taxes on the fair market value of the shares even if they haven't yet vested, or if you paid less than the fair market value as part of a bonus arrangement.

Military Bonuses and Federal Taxes

If you're in the military, any bonuses you receive are also included in your taxable pay. The exception to this rule is pay and bonuses received in any month in which you also deployed to a combat zone. An enlistment bonus earned while serving in a combat zone also gets the exclusion, even if the bonus is paid after you leave the combat zone. The IRS also excludes pay and bonuses from taxable income during any time you're hospitalized for an injury suffered in a combat zone, up to a limit of two years.

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