Employers can use bonuses to incentivize and reward various employee behaviors, such as meeting performance goals or referring new workers. However, calculating bonus payouts and tax withholding can be complex for both employers and employees in the United States. In this guide, we discuss the main types of bonuses and provide instructions on how to calculate bonus pay and taxes using the 2024 rates.
A bonus is an extra reward given to employees in addition to their regular wages or salary. Most bonuses are monetary, but some employers also offer non-cash bonuses. There are several types of bonuses, including non-discretionary bonuses outlined in the employment contract, discretionary bonuses given at the employer’s discretion, sign-on bonuses for new employees, milestone bonuses for hitting performance goals, annual bonuses at the end of the fiscal year, retention bonuses to keep key employees, referral bonuses for referring new hires, holiday bonuses at the end of the year, spot bonuses for exceptional performance, and non-cash bonuses like extra paid time off.
Bonus pay is typically calculated as a percentage of the base salary or gross wages. Some bonuses are offered as flat rates. Bonuses in the U.S. may be taxed using the percentage method, where bonuses are taxed separately at a fixed rate, or the aggregate method, where bonuses are combined with regular income and taxed accordingly. Bonuses are also subject to additional payroll taxes such as Social Security and Medicare.
To minimize the tax impact of a bonus, employees can contribute to their 401(k) or IRA and request to defer the bonus payment to a lower tax year.
