Salary and bonus payments are subject to federal income tax, Social Security tax, Medicare tax, and applicable state taxes. Your salary is regarded as regular payment, while your bonus is considered supplemental wages. Different tax rules apply to both. For example, federal income tax withholding on bonuses is based on how payments are made. Depending on the situation, your bonus may be taxed at a higher rate than your salary.
Combined and Unspecified Payments
To calculate federal income tax on your salary, your employer uses the Internal Revenue Service tax withholding table that matches your taxable salary and pay period, plus the number of allowances and the filing status shown on your Form W-4. If your salary and bonus payments are combined and the amount of each is not specified, your employer withholds federal income tax as though the total were a single salary payment
Salary and Bonus Shown Separately
If your salary and bonus are broken out separately, your employer may withhold federal income tax from the bonus at 25 percent, as of 2015. This method is allowed only if your employer withheld federal income from your salary in the current or immediately preceding year. The IRS has a more complex method for figuring withholding if that didn't happen. In this case, your employer first identifies your salary from the current or preceding year and figures withholding on the amount. Then it adds your salary and bonus together and calculates withholding based on the federal withholding tables. Lastly, your employer subtracts the tax amount for your salary from the total withholding for your salary and bonus, then deducts the difference from your bonus.
Social Security and Medicare Withholding
As of 2015, Social Security tax is withheld from salary and bonuses at 6.2 percent, up to the annual wage limit of $118,500. Medicare tax is withheld at 1.45 percent of all salary and bonuses. If your total wages amount to more than $200,000 in a year, an additional Medicare tax of 0.9 percent is withheld from the amount that exceeds that threshold.
Bonuses Over $1 Million
Supplemental wages come in other forms besides bonus, including severance pay, overtime pay, commissions, back pay and accumulated sick leave pay. If all your supplemental wages for the year equal more than $1 million, your employer must withhold federal income tax on the excess amount at 39.6 percent.
State tax laws on salary and supplemental wages vary. For example, employers in Colorado deduct state income tax from bonuses at 4.63 percent; the state withholding tax tables is used for salary payments. If you work in a state that does not have an income tax, such as Alaska or South Dakota, no state income tax should come out of your salary or bonus.
Bonus taxes can take a large chunk out of your wages. Some employers try to help employees out by minimizing their withholding. For example, if your employer offers you the bonus in the form of a raise, accepting the raise may result in lower taxes. Some employers absorb the entire tax cost so employees can get the full bonus amount.