Whoohooo, I feel like I've opened a can of worms and I've only written the title. I was doing some research on military bonuses, and I was amazed at the number of comments about the taxes on bonuses. What struck me the most is that it seems that many people don't understand how the taxes on bonuses work as part of the overall income tax structure.
I've seen comments such as:
My wife got a $12000 enlistment bonus last year.It was taxed before she got it,She netted $9000. Her income on her w2 was $9000 more than usual wich put us in a higher tax braket and gave us less than usual on our return. Did we get double taxed,or should i say overtaxed.It seems like if we had already been taxed on the $12000 bonus it wouldn't be taxed again when we file. what am i missing here? Military.com forums
Funny thing, I was talking to my career jammer yesterday and he mentioned that you can get back the money they take from your bonus at the end of the year when you do your taxes. I'm not sure if it's true or not, but definitely worth looking into. Military Times forum
(comments quoted without editing)
Here's the key to the whole thing: bonuses are taxed like regular income. There are taxes withheld on bonuses like there are taxes withheld on regular pay. Because it would be impossible calculate the right amount of taxes for everyone who gets a bonus, taxes are withheld at a high rate, higher than the regular rate for most military taxpayers. However, the amount of taxes that you ultimately pay for the year are the same, whether you get a bonus or whether you get a larger base pay.
How does that work? When you file your income tax return at the end of the year, you add up all your taxable income and figure out how much you owe in taxes for the year. Then you add up the money you've had withheld for the year, plus any credits, and figure out if you've withheld the right amount, or if you've withheld too much or too little. It is nearly impossible to get withholding exactly right, so most people have either withheld too much and get a refund of their overpayment, or they've withheld too little and they owe more to pay the total tax bill.
Bonuses, especially large bonuses, can have a big impact on the amount of total tax that you owe for the year. Therefore, taxes are withheld at a high rate on bonuses. Withholding more on a bonus payment is a good way to ensure that individual taxpayers don't get stuck needing to make large payments at the end of the year.
I hope I explained that clearly, and that you understand how taxes work and why taxes are withheld at a high rate on bonus payments. If I've just made it more confusing, let me know and I'll try to sort it out.