Congrats on the raise and/or bonus! You’ve worked hard all year long and deserve the reward. Treated as income, your raise or bonus will be reflected in your W-2. You don’t have to do anything special—just enter your W-2 as you would normally. But in case you’re curious, here are some things to know about how your raise and/or bonus will affect your taxes.
1. They’re combined with your salary on your W-2
When you get a bonus, your employer will report the amount on your W-2 in box 1 (combined with your normal wages or salary). A raise would also be reflected in your income in box 1 of your W-2. To the IRS, your bonus is the same as the salary you receive. And if your bonus wasn’t cash, your employer will still report the fair market value of it on the W-2.
2. Bonuses are taxed at the highest rate, but you might get some of that tax back now
Bonuses count toward your income for the year, so they're subject to income taxes. And unfortunately, your bonus is treated as supplemental income, and is subject to a 22% flat rate federal tax. Your bonus may also be subject to state taxes, although the rate depends on your state. Enter your W-2 in the Wages & Income section, and we’ll calculate everything for you.
3. Consider adjusting your withholdings if you got a raise
Getting a raise is a great time to review your W-4 and adjust your withholdings with your employer. You can change how much is withheld from your paycheck to offset your higher income. Ultimately, the amount of tax that’s withheld throughout the year affects how much you’ll be refunded (or owe) at tax time. So if you’re in a higher income tax bracket now, because of your raise, withholding more throughout the year can mean you’ll owe less, or be refunded more, come tax time. We’ll show you your tax rate for this year in your Federal Tax Return Summary.