The Tax Implications of Your Holiday Bonus

holiday bonus taxes

There’s nothing that rewards hard work quite like receiving a generous holiday bonus from your employer. But before you spend it all at once, how much should you set aside for tax?  

Is my holiday bonus taxable?  

Bonuses are still considered taxable income and you will have to pay federal taxes on the money. Some states also apply state taxes to bonuses. 

How do I report my holiday bonus on my tax return?  

If your employer pays you with the normal payroll system, then you do not need to report it.  However, if your employer pays you in cash or check, you must report the income on line 7 of Form 1040.  

What kind of income is my bonus?  

Bonuses are considered “supplemental wages.” This means they are compensation paid on top of the employee’s regular wages. Other types of income in this category are severance pay, vacation pay, bonuses, moving expenses, overtime, and commissions.  

How are supplemental wages taxed?  

There are two methods for withholding tax from supplemental wages: the percentage method and the aggregate method.  

The percentage method is a flat 22% tax. Your bonus would be singled out from your other income and taxed directly. This is the easiest method for employers.  

The aggregate method means that your employer combines your bonus with your regular wages and withholds the total as if it were one single payment. This method is harder for employers and usually ends up with a higher percentage of wages being withheld for taxes.  

How can I pay fewer taxes on my holiday bonus?   

Consider maximizing the benefits of your bonus money by making a year-end contribution to a 401(k), IRA or a donation to a qualifying charitable organization to get a tax deduction.  

What if I receive my bonus on a gift card? 

A gift card bonus is referred to as a fringe benefit, meaning it is compensation or other perks given to an employee in addition to wages. Gift cards are also considered cash equivalent items, making them taxable. 

The tax works the same as any other bonus or supplemental wage. However, if you receive a gift card for a specific item that has a low value equivalent to something like a ham or fruit basket, this is not taxable. 

This article was last updated on 11/21/2022. 

Disclaimer:
This article is intended to provide general information to the public and does not provide personalized tax, investment, legal, or business advice. You should seek the assistance of a professional for advice on taxes, investments, and any other financial, legal, or business matter pertinent to your individual situation.

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