How Are Bonuses Taxed

It’s a conversation that echoes across anesthesia break rooms. “I’m getting a bonus, but the taxes are killing me!”

Now, I understand. Seeing those bonus checks and the taxes taken out can hurt. 

However, is it as bad as you think? Do you know what method is being applied to calculate the tax? Would you rather not receive a bonus at all?

Before we dive into answering these questions, it’s worth noting that the number of bonus opportunities has skyrocketed. Looking at posts on the BagMask.com job board, bonuses can be found in almost every job offer. From sign-on bonuses to merit and even retention bonuses, the market is hot right now for Anesthesiologists, CRNAs, and CAAs.

How Is Your Bonus Taxed?

First, you need to understand that bonuses are categorized differently from normal income in the eyes of the IRS. They’re considered “supplemental income,” which means they’re subject to different requirements, including how they’re dispersed, reported, and taxed.

Next comes the plot twist.

Your group gets to play a round of “Choose Your Own Adventure” when it comes to calculating the withholding on your bonus. Yep, they get to decide which math equation to use. 

This choice can change the game in two ways: first, how big a piece of your bonus makes it to your bank account, and second, the amount of tax you’ll owe for the year.

It’s a bit of a curveball, huh? It’s a good reminder that when it comes to bonuses and taxes, it’s not always as straightforward as it seems.

The IRS has two ways to calculate tax withholding on these, known as the percentage method and the aggregate method.

The Percentage Method

Imagine your bonus hitting the bank account separate from your paycheck.

Chances are, your employer is playing by the percentage method rules here. If your total bonuses for the year are less than a cool million (we can only wish in anesthesia they broke this barrier), they get taxed at a 22% flat rate.

Now, why would an employer use this method? Simply put, it’s like a pre-set microwave meal: quick and easy. 

But, every silver lining has a cloud. Here’s the hitch: not everyone’s tax bracket is set at 22%. As anesthesia providers, your tax bracket is in the big leagues, which means the IRS probably didn’t withhold enough of your bonus for taxes.

Translation? An unexpected tax bill could be waiting for you at the end of the year. 

This is probably why most anesthesia groups don’t use this method.

The Aggregate Method

This method comes into play when your employer decides to combine your bonus and regular paycheck into one grand payment.

So, picture this: Your bonus and regular income are dancing together on the same paycheck. Then, your payroll department plays the tax DJ, cranking up the withholding rate on the whole amount. 

The rate they choose depends on your filing status and the information you provided on your W4. Most likely, they’ll end up withholding 37% of your paycheck for taxes.

What’s the cool part about this method?

Well, it’s not perfect, but it does increase the odds of withholding just the right amount to cover your tax liability. That’s code for “less chance of a shocker tax bill courtesy of your bonus.”

But like anything in life, it’s not all rainbows and unicorns. The aggregate method can be a bit of a headache for your employer to calculate, and there’s still a chance of withholding too much. That could mean your paycheck gets reduced more than necessary.

But hey, look on the bright side – this could also mean your withholding for the year is spot-on, or even better, you might be in for a tax refund. Talk about a plot twist, right?

Real-Life Example

In this example, we are going to keep it simple. You are married, make $300,000 per year, and file your taxes jointly. This lands you in the 24% tax bracket. Your anesthesia group gives you a 0k bonus.

If your employer uses the percentage method, your 0,000 bonus for 2023 is taxed at a flat rate of 22%, and you receive a bonus check for 5,600. This isn’t far off from your normal tax bracket of 24%. So, you would owe a little money from the bonus when you file your tax returns.

However, if your employer uses the aggregate method, your next paycheck would be your normal pay plus your bonus. At $300,000 per year, your normal paycheck is 1,538 each pay period. So, this one paycheck would be 1,538+0,000=$31,538.

And while the bonus is just a one-time payment, your employer calculates your federal tax withholdings for that paycheck as if you make $31,538 every paycheck, placing you in the 37% tax bracket. So out of that 0k bonus, $7,400 is going to taxes.

Unfortunately, this means seeing less upfront money from your bonus. However, you’ll probably receive a refund from the IRS after you file your taxes to compensate for the excessive withholding.

In real life, your yearly taxes will be affected by either method, and the impact will vary based on your filing status and annual income. However, these examples at least provide an idea of what to expect.

So, Is It Worth It?

Of course, it is! 

Even though it hurts to see so much taken away in taxes, you’re still earning more money at the end of the day. So, take advantage of the current market and enjoy these newfound bonuses that weren’t offered not that long ago.