Tax Breaks: The Cozy Season, Complicated Taxes Edition |
With just a few days left in the calendar year, many employees have their fingers crossed for a big bonus. Are you one of them?
While a new study suggests that the number of workers getting a bonus has been slipping (fewer than 40% of employees received a bonus in December 2024), those lucky enough to get one may wonder how much of a boost they’re actually getting.
My advice? Ignore those social media posts and well-meaning friends that suggest it will result in a huge tax hit—that’s a myth perpetuated by confusing withholding rules.
If you receive a bonus from your employer, you report it as income in the year that it's received unless it's expressly excluded. So, if you receive your bonus in December of 2025, it’s reportable in 2025—that’s the tax return you’ll file once tax season opens next year, in 2026.
If, however, your employer promises to pay you a bonus in the future, you don't have to report it until it’s made available to you. That means if your employer promises you a 2025 bonus, but it won’t be paid until 2026, it’s not reportable until 2026—that’s the tax return you’ll file in 2027.
If you're an employee, that income should show up on your Form W-2. That's because it's taxed the same as the rest of your wages There's no extra tax on bonuses, despite what you've heard around the water cooler.
(A hefty bonus could push you into a higher tax bracket, but the U.S. has a progressive income tax. That means the higher tax rate applies only to the amount over the threshold.)
So, outside of the tendency to forget about the progressive nature of our tax system, why is there such a misunderstanding about the tax treatment of bonuses? Withholding rules.
When you are paid, your employer must withhold federal income tax. However, the IRS may treat your bonus as "supplemental wages." If that happens, the amount withheld may be higher than your regular income tax bracket.
Even if your withholding differs, your bonus will be treated as regular compensation at tax time. So, whether your employer withholds 22% or 28% on your bonus, if your tax rate is 24%, you'll pay 24% at tax time. If your employer withheld too much, you'll get the difference back as a tax refund. If your employer withheld too little, you'll have to pay the difference. If the amount of tax withheld for the year is not enough, you still have time to make an estimated tax payment: the deadline for making a payment for the fourth quarter of 2025 is January 15, 2026.
Speaking of estimated tax payments, the 2026 tax filing season is just around the corner. The IRS has been urging taxpayers to take a few simple steps now to make next year’s filing process smoother, faster, and less stressful.
That includes getting up to speed on significant changes that could affect your tax picture thanks to the One Big Beautiful Bill Act (OBBBA). OBBBA contains several high-impact provisions that taxpayers will need to understand before filing, including new rules like “no tax on tips,” “no tax on overtime,” “no tax on Social Security,” and “no tax on car loan interest.” Importantly, these aren’t exemptions—they are temporary tax deductions, and a number of rules and exceptions apply.
Companies are also facing changes to their tax bill, thanks to OBBBA, including the ability to immediately expense domestically-sourced research and development (R&D). The law is retroactive, meaning many companies that couldn’t take advantage of R&D tax benefits over the past several years can now claim them. That’s the good news. However, as part of the Inflation Reduction Act of 2022, large U.S. corporations now face a 15% corporate minimum tax on adjusted financial accounting income. That