How are Bonuses Taxed in California?

There’s always something very exciting when you hear you’ll be receiving a bonus from your employer. However, that excitement can often lead to disappointment when you realize you not only have to pay taxes on the bonus, but oftentimes, it’s more tax than expected. In California, bonuses are taxed differently from regular income. They are considered supplemental income and are subject to both federal and state taxes. California uses a flat rate for state tax on bonuses, distinct from regular income tax rates. The federal taxation of bonuses can be calculated using either the percentage method or the aggregate method, regardless of your tax bracket. Additionally, the tax rates can vary by state. Let’s look at how bonuses are taxed in California. 

Seeing a bonus shrink after taxes can be frustrating. Understanding how extra pay is handled can ease the surprise, help you plan ahead, and make your earnings feel less confusing.

Like regular pay, bonuses are subject to both federal and state tax. Many believe that bonus pay is just like a regular paycheck and is added to your regular income and taxed at that rate. But that’s generally not the case. Bonuses are typically considered supplemental income and that is taxed at a different rate. The federal bonus flat tax rate is 22%. In California, bonuses are taxed currently at a rate of 10.23%. For example, if you earned a bonus for $5,000, you would owe $511.50 in taxes on that bonus to the state of California. In some cases, bonus income is subject to additional taxes, including social security and Medicare taxes.

When it comes to the employer paying taxes on the bonus, there are two ways a business owner may choose to do so. The first option is called the percentage method and it’s the simplest way to pay bonuses. This method is used when the employer pays the bonus and withholds the California bonus tax rate of 10.23% and 22% federal flat rate.

The other way an employer can withhold bonus tax is through the aggregate method. This is when the bonus is issued with your regular salary payment and you are taxed at that higher rate. However, if an employer uses the aggregate tax method ,that does not mean you will end up paying more tax on your bonus. You’ll likely see that difference come back in the form of a tax refund.

 
 
 
 
 
 
 
  
 
 
 
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If you’re confused about how bonuses are taxed in California or on a federal level, an experienced tax professional can help you determine what you should be paying in bonus tax. Not all states have a tax on bonuses, so make sure to talk with a tax attorney or professional if you need help with bonus tax structures.

Allison Soares is a partner and tax attorney at Vanst Law LLP. Before starting her own practice, Soares was a partner at a tax law firm where she honed her skills handling a wide variety of tax and employment-related cases. In addition to her legal work, she has worked in accounting and utilizes that knowledge to her advantage while handling cases involving EDD audits.