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 that they are compensation paid on top of the regular wages the employee earns. 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 25% 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 pays your bonus with your most recent regular paycheck. The normal withholding amount specified on your W-4 will be taken from both amounts. This is harder for employers and also 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 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, or compensation or other perks given to an employee in addition to wages. Gift cards are also considered to be a cash equivalent item, which makes 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 is up to date and accounts for tax law changes for tax year 2018 (tax returns filed in 2019). Learn more about tax reform enacted under the Tax Cuts and Jobs Act here.

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