I work in a profession where my bonus is a small set amount and isn’t guaranteed (you have to qualify for it). I really look forward to earning the bonus and have to work pretty hard to get it. So why are bonuses taxed when I already have my regular salary chopped up? It’s pretty disheartening to see this small amount reduced after earning it.
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I am not a tax person/cpa/whatever, but basically it’s because that’s income and the government wants their share. Why do you think the company should pay you but that money not be taxed?
A bonus is income. It is taxed like income. You don’t get special privileges just because it’s a bonus…
Whether it’s fixed salary/paycheck, fluctuating hourly paycheck, or annual/quarterly bonus, it’s all income as far as IRS is concerned. All money earned for working is income and taxed the same — the IRS doesn’t differentiate how your employer classifies the payment. Also, were the IRS to do so, it would be super easy for companies to manipulate that — just pay minimum wage and a huge bonus. Your bonus might be small relative to overall pay, but you could have Wall St. workers earning “minimum wage” with $1m bonuses.
Because it’s still taxable income. Whether you were guaranteed that bonus, or whether that bonus was paid out in one year-end lump some or split up between all your paychecks doesn’t change the fact that it was income you earned.
If you’re in the USA and you earn money by working for it (income) you have to pay taxes on that money. Either it’s your hourly wage or tips or a bonus, etc. If it’s income then you are required to pay taxes on it.
In Canada we use the magic word “source”. That means a source of income that is predictable – it’s actually pretty complicated, but we’ll leave it there. So employment is a source, and the money you receive under an agreement is taxable.
In Canada, windfalls are not taxed. So lottery winnings are not taxed. If an employee gets a bonus that is strictly from the boss’s generosity, that is not taxable. When the bonus comes from a set formula, and you could sue for it if you get it, that is income from a source.
Our Income Tax Act has a “screw you” provision called the General Anti-Avoidance Rule which lets CRA come after you if you try and get tricky. Another commenter made a great analogy, $1 salary and $1M bonus. You can look forward to a visit to Tax Court and lawyers fees.
Just imagine what would happen if its not taxed. Everyone would just have their salaray as a bonus with some kind of requirment that you can fullfill everytime.
It is even worse, your bonus gets taxed by your highest tax bracket and may even get into a higher tax bracket then your normal salary. Meanwhile a lot of your normal salary is in the lowest tax bracket and may not even be taxed at all.
The issue is that it is impossible to differentiate between normal salary and bonus salary. You may have a modest bonus which requires a lot of extra effort to reach but a lot of people may depend on their bonus. For example it is typical in sales and a few other positions that half the salary is expected to be bonuses based on your performance. It is not a nice little extra for when you work harder but an expected reward for the work you do. And it will therefore have to be taxed accordingly. And some upper management might get almost all their salaries as bonus based on the company performance and it would be pretty bad if they did not get taxed.
People would just get a low standard pay with a massive bonus attached if it was untaxed to get around the law
If you’re in the US, here’s what I do.
When my bonus is coming, I changey tax status to exempt.
Then I get all of my money.
Then I change it back.
The amount I pay via all other paychecks balances it out.
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