An annual bonus from your employer is always a welcome additional amount of income. However, sometimes it seems the tax bite out of a bonus check takes more than is left for you. Your employer is probably using the Internal Revenue Service (IRS) tax rules for bonus, and then there are other taxes that must be held out of a bonus check.
Federal Tax Withholding
Employers have the option on bonus payments of withholding tax at the same rate as your regular paychecks or at a flat 25 percent. Many employers chose the 25 percent option. This choice makes the calculation easy and avoids trying to find out if the bonus puts the employee into another tax bracket. The 25 percent withholding rate can be used on bonus payments up to $1 million. Above $1 million, the amount of bonus above that level is withheld at 35 percent.
Social Security and Medicare
Social Security and Medicare taxes will also be withheld from your bonus check. If you have earned less that $110,100 -- for 2012 -- Social Security taxes will be withheld at a rate of 4.2 percent. The Medicare tax of 1.45 percent is withheld from all earnings including any bonus payments with no cap on the amount of income for the year. In total, Social Security and Medicare taxes can take up to 5.45 percent of your bonus check.
State and Local Income Taxes
Most states and many cities have an income tax on wages. These taxes will also come out of your bonus check. If you live in a high tax state, the amount can be significant. For example, the state of California requires bonus checks to have state income tax withholding at a rate of 10.23 percent. States with high income tax rates include Hawaii, Oregon, New Jersey, Iowa, New York and North Carolina. Only nine states do not have an income tax.
Total Tax Withholding
Adding together federal, Social Security, Medicare and a 10 percent state income tax provide a total possible withholding rate of 40.5 percent. If you were paid a $10,000 bonus, the take-home portion after all these taxes would be $5,950. It is possible you will receive some of the withheld taxes back when you file your tax return. Bonus money is not actually taxed at different rates, the withholding is just different. If too much tax was taken from your bonus, the money will come back in your tax refund.