Flat Rate Method
Employers may tax all bonuses using a flat tax rate. In 2011, the tax rate is 25 percent of any bonus of less than $1 million. If the bonus is more than $1 million, employers must deduct taxes of 35 percent using this method. Therefore, if you receive a bonus of $400, your employer must withhold taxes of $100 from your bonus and forward those taxes to the federal government to cover your half of payroll taxes.
If your employer adds your bonus to your regular paycheck rather than giving you a separate bonus check, she must use the aggregate method. That is, instead of withholding payroll taxes from your bonus check based on the current flat rate, she withholds taxes on the entire amount of your check based on the payroll taxes for the entire amount. So, if you have a large bonus, you will pay hefty payroll taxes on it if your employer uses this method.
Your employer adds any bonuses he gives you to your wages for the year and reports your total wages on your W-2. Thus, you report your bonuses as well as your wages when you file your income taxes. If your employer withheld more payroll taxes from your bonuses and regular income than you owe, you will receive a refund; otherwise, you will have to pay income taxes on your wages, including your bonuses.
Some employees worry that they will pay more income taxes altogether if they receive a bonus because the bonus will push their income into a higher tax bracket. However, Consumerism Commentary states that this fear is not justified because the IRS does not distinguish between bonus pay and regular pay; if you overpaid taxes during the year, you will get a refund regardless of whether your bonus makes it appear that you earned a far larger amount of income throughout the year than you would have earned without the bonus.