Receiving a bonus at work usually happens toward the end of the year. Employers pay bonuses as a reward to employees for their hard work during the year, with many companies using a bonus as an incentive to motivate employees. While a bonus represents a great windfall, determining what kind of income category the bonus falls under sometimes proves difficult.
The Internal Revenue Service considers a bonus as a supplemental wage. According to the IRS, a bonus represents compensation paid outside of an employee’s regular wages. Other types of supplemental income include severance, vacation, back pay, moving expenses, overtime, commission and some fringe benefits.
How is tax applied to a bonus?
While bonuses represent a great way to motivate employees, bonus taxation presents its own hurdle come tax time. Two circumstances exist for taxes on bonuses, including the following: