The IRS has confirmed that how you withhold income taxes from supplemental pay, such as bonuses—by using a flat withholding method or aggregating the supplemental pay with other wages—is entirely up to you, employees can’t specify a withholding method. The IRS has also concluded that bonuses paid to employees who must be on the payroll on the date of payment are deductible in the year paid, not in the year services are performed.
Income tax withholding
There are three possible income tax withholding methods that apply to supplemental pay, such as bonuses:
- Mandatory flat rate withholding at 39.6% on supplemental pay exceeding $1 million
- Optional flat rate withholding at 25% for supplemental pay not exceeding $1 million
- Aggregating supplemental pay of less than $1 million with regular pay and withholding as if the total were a regular wage payment (also optional).
The IRS concluded in a General Information Letter that for t...(register to read more)