Y is for Year-End Bonus.
Did you get a bonus in 2012? If so, kudos. Annual bonuses are becoming a rarity these days. They are, however, still issued, either as recognition for making to the end of the year (!) or for outstanding service. No matter the reason, bonuses are considered taxable income to the recipient and should be included on your federal form W-2. This is true even if your bonus isn’t in the form of a check but is, instead, goods or services, such as a fancy trip or a car.
In terms of timing, a bonus is not taxable until you receive it or it is made available to you. Being made available to you is key: if you have the right to take it and you don’t, the IRS takes the position that it’s still taxable. Leaving your bonus check in your desk or refusing to sign an award notice doesn’t change the timing.
How much of your bonus is taxable depends on your personal circumstances. Don’t confuse how much tax you’ll pay with the amount of withholding by your employer. Employers have a few options in terms of calculating withholding (which may be dependent, among other things, on the amount of your bonus) for bonuses, which the IRS considers to be supplemental wages. Your bonus, however, will be taxed at the same rate when you file your federal income tax return as the rest of your wages (with a few exceptions, the most infamous being those for hedge managers), regardless of the rate at which taxes were withheld. If your employer withholds an amount that is different than your final taxable value, that will shake out when you file your tax return. If too much has been withheld, that amount will be credited to you and may result in a refund. If it’s too little, you may owe at tax time.
If your bonus affected your 2012 taxes – and you’re expecting a similar result in 2013 – check with your tax professional for ways to make adjustments.
