Stack of money with red ribbon

Your Holiday Bonus May Be Taxed

Receiving a holiday bonus is an awesome gesture. If you received a bonus this year consider yourself lucky. Hopefully, you didn’t spend it all on Christmas gifts and saved some for possible tax implications.

Bonus pay is considered taxable income by the IRS. Therefore, you are required to pay federal taxes on the money received. The IRS considers a holiday bonus as a supplemental wage which is usually taxed in a separate bracket that can result in a 25% tax withholding. More than likely, your employer paid your bonus through payroll and deducted the normal tax withholdings. This will be reflected on your W-2 in the section labeled supplementary income. In this case, you may get some of that bonus back when you file your return.

On the other hand, if your employer provided your bonus via cash or check there were probably no withholdings. This form of payment does not exclude you from paying taxes and you still have to report it as income. You should report your income on form 1040, line 7 (wages, salaries, tips, etc).

Your holiday bonus is well-deserved. Go ahead and splurge within reason knowing how much you’re getting after taxes. If you decide not to spend it all, consider maximizing the benefits by making a year-end contribution to a 401(k), IRA or a qualifying charitable organization to get a tax deduction.