Save On Taxes With An Underrated Work Bonus Trick

Work bonuses feel like a pat on the back with cash, but they do have a twist. The IRS tags these bonuses as "supplemental wages." So, while they do sweeten your bank account, they're also taxed a bit differently than your usual earnings. When it comes to taxing bonuses, employers have two main methods: the Percentage method and the Aggregate method. With the Percentage method, a flat 22% is skimmed off the top of any bonus as federal income tax — making it a straightforward choice, especially for smaller bonuses.

On the flip side, the Aggregate method combines your bonus with your regular paycheck, calculating taxes based on your total earnings and the details in your W-4 form, fitting into your overall income tax bracket. This method is typically favored by larger companies or for those with heftier paychecks. For instance, if you bag a $5,000 bonus, the Percentage method would reserve $1,100 for federal taxes right off the bat.

Keep in mind that the tax bite on bonuses depends on their size. Bonuses under $1 million get a 22% cut taken for federal taxes, but if you hit the jackpot with a bonus over $1 million, brace yourself for a 37% withholding. In this article, we will take you through different paths of minimizing taxes on your work bonus. Did you get a holiday bonus in 2024? If not, here's what a typical holiday bonus looks like (and a general guide for if you'll get one in 2025).

If you're making a good chunk of change this year and find yourself in a high tax bracket, consider pushing your bonus to next year's calendar. This little shift means you won't have to pay taxes on it just yet, potentially saving you a tidy sum if you're expecting a high-tax year. And if you're looking at retiring soon, waiting to take that bonus until after you clock out for the last time could shrink your tax bill even more, since you'll likely be pulling in less income. Or you can put it straight into your 401(k) or an IRA, helping you dodge some taxes now and beef up your retirement pot.

If you think you'll drop into a lower tax bracket in 2025 — maybe because you're retiring, cutting hours for childcare, or going part-time — holding off on your bonus could be a smart move. This way, you pay taxes on that money at a lower rate later on. However, keep in mind that deferring a bonus isn't always possible — it hinges on your employer's rules and your particular circumstances.

To see if you can really put off your bonus, it's wise to chat with your HR department or get advice from a financial advisor. They can help figure out if this move fits with your financial plans.

Now, if your company's policies do not allow deferring bonuses, don't run into trouble by going ahead anyway. Instead, accept your bonus and funnel some of it into a Health Savings Account (HSA), especially if you're on a high-deductible health plan. You do not pay taxes on the money in an HSA, so you have one less thing to renumerate to the government. And lets say you buy stocks from the HSA fund, you will not pay taxes on your profits as long as you use it for medical costs. In 2025, you can add up to $4,300 for yourself into an Health Savings Account or $8,550 for a family plan. Now if you get a high-deductible health plan here's what to expect; lower payments for your health insurance every month, but higher chances of spending some amount of your money before your insurance chips in. 

You might want to talk with your boss about spreading your bonus over a few paychecks or even moving it to next year. This method could lighten your tax load, especially if you're eyeing a drop to a lower tax bracket soon. Or you could donate part of your bonus to a qualified charity. You win and the charity wins; you get to help others and possibly reduce your taxes at the same time.