How is a bonus typically taxed?

Bonuses are typically taxed as supplemental income, which is a specific classification under the tax code. Supplemental income refers to earnings that are not part of an employee's regular wages and includes bonuses, commissions, overtime pay, and severance pay, among other forms of compensation. This classification allows employers to apply specific withholding methods when calculating taxes.

The IRS provides guidelines on how to handle withholding for supplemental income, giving employers the option to either add the bonus to the employee's most recent regular paycheck and withhold taxes at that rate or to use a flat percentage rate for withholding on the supplemental payment. These methods are intended to ensure that the tax obligations on bonuses are met in a straightforward manner.

This classification is distinct from other types of income; for instance, regular wages are taxed at the employee’s varying income tax rates based on their overall earnings. Treating bonuses as supplemental income allows for consistency in withholding practices, simplifying the payroll process both for employers and employees.