As the winter vacations are approaching, it is natural for employees to expect a year-end token of appreciation. But, the excitement of a seasonal payout comes with a common question: Are Christmas bonuses taxable in the US?
Holiday bonuses are conventional gestures to reward your hard work. They boost your morale. From a regulatory perspective, these bonuses feel like a gift. Typically, they are seen as a way of compensation. The IRS maintains rigid guidelines on how you report these payments.
Comprehending the way the IRS treats these payments is necessary. It will help employers and employees to not expect any surprises during tax season.
Is Bonus Taxable in US?
Yes, almost all forms of bonuses are considered taxable income. The IRS categorizes bonuses as ‘supplemental wages.’ This category includes any pay received in addition to your regular salary, such as:
- Commissions
- Overtime
- Prizes
Bonuses are added to your total yearly earnings. Therefore, they are subject to:
- Federal income tax
- Social Security tax
- Medicare tax
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Why are Christmas Bonuses Taxed?
The IRS sees any value given by an employer to an employee as a substitute for regular wages until it meets very specific ‘de minimis’ (minimal value) exceptions.
A Christmas bonus is usually based on your professional employment or performance. This is why the government treats it as earned income. The IRS ensures that all forms of professional compensation contribute to your total tax liability for the year.
Are Christmas Bonuses Taxable in the US?
Specifically, if you obtain a gift card, cash bonus, or a check, it is fully taxable.
Cash equivalents (like gift cards) are not tax-free gifts at all. The only rare exceptions are ‘de minimis’ fringe benefits, such as a:
- Holiday turkey
- Small gift (with a very low fair market value)
Such holiday gifts are generally not taxed – accounting for them is impractical.
Read: What is a tax district?
Are Christmas Bonuses Taxed Differently?
Bonuses are taxed at the same total rate as your regular income. But, the withholding process is different.
Percentage Method
Most employers use the ‘Percentage Method.’ This applies a flat 22% federal withholding rate on supplemental wages under USD 1 million.
Aggregate Method
Alternatively, the workers may also use the ‘Aggregate Method.’ In this method, they combine the bonus with your regular paycheck. It may temporarily place you into a higher tax bracket for that specific pay period.
The Bottom Line
Handling year-end compensation demands precision. Our top Houston tax expert offers competent guidance. We shall help you learn these withholding nuances while optimizing your tax strategy.
Whether you are an employee receiving bonuses or an employer distributing rewards, always stay informed. Your holidays must not be dampened by an unanticipated tax bill.
