Getting a bonus can probably be the best moment in the life of all employees. Employers too are happy to grant bonus to their employees for performing well. However, at most places, bonus amounts are taxed as governments and tax authorities consider it as a part of income of the person getting the bonus.
Facts About Bonus Payments
As mentioned above, bonus payments are made by employers to their employees to appreciate efforts taken by them in their place of work. Bonuses are paid from the profits made by the company during the financial year. As per rules in many places, employers have to pay a minimum bonus, which is a certain percentage of the income of the employee. Bonuses are given by both large as well as small-sized companies. Such bonuses can also help in strengthening the relationship between the employer and the employee. The amount of bonus given to employees can vary with respect to their current salary, post held and number of years spent in the organization. Now, in the next section, let us know about the taxes on employee bonuses in detail.
How are Employee Bonuses Taxed?
The bonus amount received increases the total income of employees and it is quite possible that they will be put in a different tax slab by considering their total income. So, as you move into a new or higher tax slab, your tax liability will also be more and hence you would be paying more tax when you file for taxes at the end of the year. The tax rate on bonuses is fixed by the income tax authorities and is binding on all people. However, there might be some relief on taxes on signing bonuses for people belonging to an elder category. There are many rules for employers when it comes to making bonus payments. Tax withholding is a commonly used method. It is a rule that employers will have to withhold thirty-five percent of the amount in case the bonus paid to an employee is in excess of one million dollars.
Deciding how much you will be actually paying after the issue of bonus to you will require time and some more efforts. Tax liabilities cannot be calculated just by considering your total income including the bonus amount. The tax deduction which you will be claiming on your income as per the set rules and regulations of income tax regarding investments will also come into play while deciding the taxable amount. Bonuses paid to employees on a lump sum basis may not undergo withholding and the employer will be directly reporting the amount paid as bonus to the Internal Revenue Service (IRS) by filling up the concerned forms. For filing the taxes properly, it is mandatory for the employees to correctly declare the amount of bonus received by them while filing for each tax. The concerned individual would be responsible if any kind of wrong data is submitted regarding the amount of bonus received.
The strict laws in place help in systematic collection of taxes from people belonging to all the sections of the society. In absence of such a fool-proof system, the problem of circulation of black money can arise to a great extent which is not good for the economy as a whole. There have been many debates on whether taxes on bonuses are just or not. However, one thing is clear, that till it is a rule, every person is expected to abide by it. So, hoping that this article has cleared all your doubts, I would like to sign off here. Good luck and work smart!
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