S:always United StatesEmployees working this Christmas will enjoy their holiday bonuses as companies tend to show their appreciation for their employees’ efforts during the holiday season.
Some employers opt for a personalized gift, cash reward, or even paid time off, while others may avoid bonuses for all employees to boost morale in the organization.
How to avoid paying tax on holiday bonuses?
Where you receive a separate payment from your regular salary, your bonus will be taxed at a flat rate of 22 per cent. However, if your employer chooses to include it in your salary, it will be taxed as regular income.
It should be noted that you cannot avoid taxes on your bonus, but there are several ways to minimize them. For example, you might consider using some or all of the bonus to increase your contributions to a 401(k) plan.
In 2022, you can make up to $22,500 total, and $7,500 for individuals age 50 and older.
Contributing to a regular IRA account is another method you can use to reduce the amount of tax you owe with a bonus check.
You can deduct such contributions from your pre-tax income, which reduces the amount of income that is subject to tax and helps offset the tax burden associated with your bonus payment.
Meanwhile, you can reduce your contributions to a retirement plan at work, such as a 401(k), if your income falls below a certain threshold. The maximum for single taxpayers is $78,000 in 2022, and the maximum for married couples is $129,000.
For 2023, the maximum is $136,000 for married couples filing jointly and $83,000 for single taxpayers. The income threshold for deducting contributions is $214,000 for 2022 and $228,000 for 2023 if you don’t have a retirement plan but your spouse does.