Are bonuses taxable?

Yes, bonuses are considered supplemental wages and therefore are taxable. As defined by the Internal Revenue Service (IRS) in the Employer's Tax Guide, “supplemental wages are compensation paid in addition to an employee's regular wages. They include, but are not limited to: bonuses, commissions, overtime pay, payments for accumulated sick leave, severance pay, awards, prizes, back pay, retroactive pay increases, and payments for nondeductible moving expenses.”

The amount of federal taxes withheld from the bonus will depend on your answer to the following—Was the bonus combined with regular wages or identified separately from the employee’s wages? If an employer combines the bonus with the regular wages (and it’s not identified separately), then the total amount (regular wages plus the bonus amount) will be taxed under one tax bracket.

Conversely, if the employer decides to separate the bonus from regular pay, then the employer has two choices on taxing the bonus amount. The first option is to withhold a flat tax percentage set by the IRS from the bonus amount. The second option is to add the amount of the bonus to the last pay period's regular wages. Then, the employer will determine the amount of federal tax that would have been withheld from that total. Once the employer has the amount of taxes that would have been withheld if the bonus and regular wages were combined, the employer subtracts the amount of federal taxes already withheld from the regular pay. The difference in the tax amounts will be the amount withheld from the bonus check. See IRS Publication 15 Supplemental Wages.