Receiving a gift or bonus check from your employer is always a cheerful way to wrap up the year. Unfortunately, the holiday season quickly leads up to another, less festive time of year — tax season. End-of-year extras like cash, gift cards, watches and even Bitcoin can affect your federal income tax return, so it is important to learn the facts (and a few helpful tips) before filing.
Bonuses are considered taxable income.
According to Forbes, an end-of-year bonus “must be reported as income in the year that it’s received unless it’s expressly excluded (like some stock options).” You should see this income on your W-2 form by or shortly after January 31st. Promises of future compensation are excluded until paid.
You may be taxed a little more upfront.
When you are paid, your employer is required to withhold federal income tax, and the IRS considers anything extra as supplemental wages for withholding purposes. Depending on the bonus amount and your current salary, you may be bumped into a higher tax bracket for that month.
There is no need to panic.
If you received a bonus and your employer withheld too much, you should get a refund on your tax return this year. Working with a tax accountant can help to secure the best result possible. On the other hand, if your employer withheld too little, you will likely have to pay the difference.
A bonus is taxed in one of two ways.
If your bonus was paid along with your regular wages, it is treated as payroll and taxed just the same. If your bonus is paid separately, your employer may withhold a flat 22% or they may opt to use a formula that determines the rate based on your regular and combined withholding amounts.
Bonuses over $1 million are treated a little differently.
First, if you received more than $1 million in supplemental wages, give yourself a big pat on the back! Second, know that you will be paying a much higher rate this tax season. The maximum rate for “other income” is 37% to be exact. In this case, you definitely should be working with a tax accountant.
Gifts are also taxable, unless they are of “minimum importance.”
Some non-cash items are considered compensation and are also taxable, just like bonus checks and cash-equivalent items like gift cards. Typically, inexpensive services and small gifts (like a scarf or fruit basket) are classified as de minimis — Latin for of “minimum importance.” In other words, the value is too small to be counted as income.
As always, working with a certified tax accountant like Anthony F. Drake can help to ensure accuracy and the best outcome this tax season. If you reside in the Greater Philadelphia area and are in need of assistance, contact Drake Tax Services today!
Drake Tax Services has been serving the greater Philadelphia area since 1997. Its founder, Anthony F. Drake, is a professional accountant and IRS approved tax preparer who specializes in local, state and federal tax returns for both individuals and small businesses.
