Is Bonus Taxed For NRI’s In The US
It is essential for companies to keep their top-performing employees with them for a longer duration. One of the proven techniques for doing the same is to pay a bonus. It not only incentivizes employees but also boosts their motivation levels.
However, as an employee, it is only natural to wonder how you will be taxed on it. Is there a separate tax for the bonus? Is there any way to reduce your tax liability on a bonus?Here is all that you need to know about taxes on bonuses for NRIs in the US.
Are Bonuses categorized as supplemental wages?
It should not come as a surprise that the IRS goes to greater lengths to define different sources of income and tax them accordingly. Bonuses usually are put under the category of supplemental wages. Likewise, they are treated a bit differently from normal salary as far as withholding taxes during payout is concerned. Here are the two standard methods followed to withhold taxes from a bonus.
- Aggregate Method
The aggregate method comes into the picture when your employer pays the bonus with one of your recent paychecks. Your employer then refers to the withholding tables by the IRS to determine the amount of taxes that must be withheld for both the amount together. Your employer would then take into consideration the amount withheld from your salary and withhold the remaining amount from the bonus.
- Percentage Method
The percentage method is easier of both the methods. According to the percentage method, the bonus that you receive is subject to a flat supplemental rate of 25%.If you were to receive a bonus of $10,000 you would have to pay $2,500 as taxes to the IRS. Employers usually choose this method, since it is easier to implement and consumes less time as compared to the aggregate method. Also, the percentage method usually results in a smaller tax amount being deducted or withheld.
There might be instances where your bonus might push you to a higher tax bracket. Should you expect to make less in the next year, you can ask your employer to defer the bonus to the next year.
High End Bonuses
Few organizations are known to pay their employees with hefty high-end bonuses. These corporate bonuses can at times exceed the $ 1 million mark. How are taxes handled in such cases? These high-end bonuses attract much higher taxes as well. For NRI’s receiving more than $ 1 million in taxes, your employer will withhold a tax of 39.6% for the amount exceeding $ 1 million, on the top of the flat 25% tax using the percentage calculation method. Thus, for the hefty bonuses, taxpayers end up paying hefty taxes as well.
There are chances that your employer might withhold a higher amount of taxes from your bonus. Yet, you should not panic about the situation. Keep in mind that the taxes withheld are at a higher rate during the payout. But it would change later based on the actual taxes that are applicable to your income. The actual tax rate comes into the picture when you file for your taxes and there are chances that the tax rates can be lower due to lower taxable income after deductions.
Your taxable income plays an important role along with the tax rate, deductions and credits in determining how much taxes you will end up paying from your bonus. Proper tax planning can help you get back some of the taxes in the form of credits once you file your tax returns at the end of a financial year.