Here is how bonuses & incentives and expenses are taxed in the U.S.
Bonuses and Incentives
- Bonuses and incentives in the US are typically considered supplemental wages and are therefore subject to both federal and state income tax. Typically, they are subject to tax withholding at the supplemental rate which may be different than an employee’s regular withholding rate.
- The federal tax withholding rate on supplemental wages up to $1M is a flat rate of 22%.
- Social Security and Medicare taxes (FICA), are always processed except for individuals on specific visas. The rates do not vary with supplemental pay and amount to a total of 7.65%.
- The breakdown is: Medicare = 1.45%, Social Security = 6.2%
- State taxes on bonuses vary depending on the state.
- If an employee gets reimbursed for legitimate business expenses (e.g., travel, meals, accommodation), these reimbursements are typically not taxable.
- Payments to an employee for business-related expenses an employee incurred personally are reimbursed without tax.
- Examples: travel, lodging, meals, mileage for work travel, supplies necessary for the position
- Requirements: submission of receipt or payment document matching the expense request
- Payments to an employee for fringe benefits that are not excludable from taxes.
- Examples: gym membership, wellness items, gifts
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