Nearly 80% of employers offer holiday or year-end bonuses, according to a study conducted by Challenger, Gray & Christmas, Inc.
A bonus can be awarded in the form of cash, gifts cards, or gifts. While it is always exciting to be surprised by a “gift” from your employer, there are important tax consequences for any holiday bonus received. Let’s cover some important points regarding the tax on your bonus.
The Cash Bonus
One of the most common end-of-year bonus delivery methods, is cash or check from your employer at the annual holiday party. If your employer does this, the bonus amount should be added to the W-2 you receive in January. A cash bonus is treated similarly to wages, and is taxed as such. You will report the bonus as wages on line 7 of Form 1040.
Additionally, in the eyes of the IRS, gift cards are treated as cash equivalents and will be taxed the same as cash or a check.
It’s important to understand the withholding rules here because the tax liability on your return may be affected if you under-withheld throughout the year.
Often, there may not be withholding on the bonus, especially if your employer just gave you a $100 bill at the company holiday party.
Even though bonuses are often taxed at the same rate as your wages, there may be instances of differences. For example, if your bonus was paid separate from your normal paycheck; like a check or cash at the holiday party. Different tax treatment may also occur if you are lucky enough to receive a bonus of more than $1 million.
Bonus Tax Rate Brackets
Our tax treatment of bonuses blog from earlier in the year offers more detail regarding the tax on your bonus:
Bonuses That Equal Less Than $1 million
The taxation on bonuses less than $1 million depends on whether the bonus is included in the same paycheck as your other wages or in a separate paycheck.
Bonuses paid with your typical wages, and not separately identified, will be taxed in the same manner as your usual wages. However, by combining the two for that tax period, your tax rate for that period may increase as if that was the amount you would be paid each paycheck for the remainder of the year.
If the bonus is paid or identified separately, it can be taxed at a flat rate of 25%. Your employer can also choose to treat the bonus as though it was paid with other wages to determine your tax rate.
Either way, the paying of the supplemental wages will increase your tax rate for that period, so be prepared.
Bonuses That Exceed $1 million
Any excess wages over $1 million will be taxed at a rate of 39.6%.
Reporting Cash Bonuses
Although a cash bonus generally receives a different tax treatment, it should still be reported on your W-2.
- If an employer reports your bonus on a 1099-MISC, you should immediately request a cancellation of the 1099-MISC and a corrected W-2.
- If your employer will not provide a correction, you can still appropriately report your bonus. Report the wages shown on the 1099-MISC on line 7 of your Form 1040 and supply Form 8919 to report your uncollected Social Security and Medicare tax.
If you receive a non-monetary gift from your employer every year — a la holiday ham, ornament, or even a weekend getaway — you likely will not be taxed on this gift. This category of gifting is often referred to as “de minimis fringe benefits” and are excluded from your income.
In most cases, your employer will determine whether a non-monetary gift is a de minimis fringe benefit. A de minimis fringe benefit is occasional or unusual in frequency, and small enough in value to make the accounting for it unreasonable or impractical.
The de minimis fringe benefit rules do not apply to gifts of cash or cash equivalents. Therefore, the rules discussed above in the “cash bonuses” section apply to any gift of cash received by an employer.
If you have any questions regarding this year’s holiday bonus, contact your local H&R Block tax pro for more details.