As End of Year Bonuses Roll in, You Might Wonder Why Bonuses Are Taxed So High

When the year is coming to a close, some people get to enjoy the luxury of a bonus from work. This could be anywhere from a few hundred dollars to thousands. For many people, bonuses won't shift their tax landscape significantly.

But for some, that hefty bonus that came just in time to provide some relief around the holidays may cause you a headache in the new year when it comes time to file taxes. Why are bonuses taxed so high? Here's a quick breakdown.

When it comes to how income taxes are calculated, it's complicated. Perhaps more complicated than most people realize. With sales tax, for instance, it's easy. You just pay a percentage of your overall purchase. But wait, you had a discount. Does the sales tax apply to the discounted amount or the full purchase price? And what about sales taxes across states? OK, so maybe it's not simple.

And the bad news? Income tax is far more complicated.

People who received bonuses of several thousand dollars may get to filing their taxes the next year and realize they have less money in hand than they expected. And that's because bonuses are viewed as supplemental income and withheld at a higher rate than other income, per The Currency.

The way these numbers impact you vary based on your individual W-4, the amount on the bonus check, and the way your employer calculates withholdings on your pay stub. They can use either the aggregate method or the percentage method. Many choose the simpler percentage method.

With the percentage method, employers withhold 22 percent for taxes on the first $1 million in supplemental income and an additional 37 percent on any portion of the bonus that is over $1 million.

With the aggregate method, employers will combine bonuses with regular income.

Either way, a large enough bonus will impact your overall income, be withheld as supplemental income, and may impact your tax bill due when you file for the following year's taxes.

And how those taxes are calculated is where it gets extraordinarily complicated. Federal taxes calculate income tax owed based on a marginal tax rate system that adds an amount of additional tax paid for every additional dollar earned as income.

We'll back it up a little to explain it more simply.

Everyone fits into a tax bracket. You will be taxed based on that tax bracket and every tax bracket below you.

For instance, if you are a single filer who earns between $47,150 to $100,525, you will be taxed 22 percent on every dollar of income that exceeds the $47,150 lower limit. So if you make $49,150 per year, $2,000 of your income will be taxed at 22 percent.

There are two tax brackets below this, ranging from $11,600 to $47,150 and from $0 to $11,600 for single filers.

A person who earns $49,150 per year will be taxed 22 percent for their top $2,000; 12 percent on their income earned between $11,600 to $47,150; and then 10 percent on their first $11,600 earned that year.

There are seven tax brackets for U.S. federal income tax; 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent, and 37 percent for the highest earners. Those top earners will be taxed with percentages corresponding to every tax bracket for the appropriate income.

And yes, this is why accountants make the big money.

If you're worried about the impact your bonus may have on your taxes, especially if it pushes you into a higher tax bracket and therefore higher tax percentage, there are a few things you can do.

You can defer your bonus to the next year, working with your employer. You can increase your tax deductions. Or you can contribute to a tax-advantage account.

A financial advisor or accountant will be able to help you determine which one gives you the most bang for your buck.