Are you expecting a holiday gift or bonus? If so, terrific. You should be aware, however, that gifts and bonuses are taxable as income. Even if your employer specifically states that you’re receiving a gift, the IRS won’t treat that present as an actual gift but rather as additional wages you have received.
You will need to report the bonus or gift as income in the year it is received. This is true no matter the form of payout — a check, cash, physical gift or cryptocurrency. The rules can be slightly different for stock options that are specifically excluded from that year’s income. If you receive stock options, you should contact a tax attorney about how to report the income.
So, if your boss hands you a check at the annual holiday party, you will need to claim it as income on your 2019 taxes. If your boss announces the bonus at the party but doesn’t actually pay it until January, you will need to remember to account for it in your 2020 taxes.
If you do your taxes off a Form W-2, you shouldn’t need a reminder. That’s because your gift or bonus should be included in your income on that form.
Despite what you may have heard, there is no surtax on bonuses for the average taxpayer. There is a chance the bonus could push you into a higher tax bracket, but that doesn’t mean you will be paying extra tax. You may be able to drop back to your original tax bracket using deductions, or you may pay a small amount of taxes in the higher tax bracket. Be aware that the higher tax rate would only apply to the amount that actually comes in over the bracket threshold.
Will my employer withhold with the gift or bonus in mind?
Generally, yes. Your employer is expected to account for the bonus or gift as if it were regular income, including withholding taxes for it.
There is a chance your gift or bonus withholding will be at a higher rate than the rest of your income. In some situations, the IRS considers this income to be supplemental wages for withholding purposes. If that happens, your employer will withhold slightly more than is actually necessary to cover your taxes.
However, again, gifts and bonuses are taxed at the same rate as your regular income, so this extra withholding will probably result in a tax refund. If, for some reason, your employer didn’t withhold enough, you would then need to make an estimated tax payment.
If you have questions about how to account for a bonus, gift, or any additional income, contact your tax lawyer for assistance.