Bonuses are a great way to motivate or reward employees, but it can also quickly change one’s tax return and the amount of taxes initially withheld depending on how the Bonus is paid.
There are two ways of withholding taxes depending on how your bonus is paid: the percentage method and the aggregate method.
The Percentage Method: a flat rate of 25% on a singled-out Bonus payment that goes directly to the IRS.
The Aggregate Method: Used when your employer pays your bonus within your regular paycheck. The normal withholding amount based on IRS withholding tables for the sum of both amounts is figured, subtract what was already withheld from your last paycheck, and withhold the rest from the bonus amount. The problem with this rather than flat Percentage is that it is most certainly at a higher rate on the combined amount.
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