One of the perks of working for someone else is that you may receive a bump in pay in addition to your regular salary. Some of these employer perks are taxed, like bonuses, stock compensation, and certain gifts.
But other benefits, such as tuition assistance and expenses your employer reimbursed, won’t be included in your ordinary income. Here’s what to know ahead of tax time, so you won’t be surprised when filing your return.
What’s considered taxable income?
Some of your extra income is taxable, and what you pay depends on a few factors.
Bonuses
Bonuses are considered supplemental pay, which is money you receive in addition to regular wages.
Your employer may need to withhold taxes from your bonus at a higher rate than what you’re used to. Thankfully, “the withholding is just an advance payment/deposit on your taxes—not the amount you actually owe in taxes,” said Justin Pritchard, a certified financial planner. “If your ultimate tax rates are lower than the withholding rate, you might get some of that back as a refund, or it could reduce the amount you otherwise need to pay.”
For federal taxes, your employer can either withhold a flat percentage on your bonus or combine it with regular wages. On bonuses under $1 million, the employer usually withholds 22%, Pritchard said. The withholding rate is higher if you’re fortunate enough to receive a larger bonus. If your bonus is subject to state taxes, too, that withholding rate depends on your state laws.
Talk about the tax withholding method with your employer.
“If you get your bonus paid separately from your wages, the payment may qualify for the flat-rate approach, which could result in a lower withholding rate,” Pritchard said.
Otherwise, you could lower your tax bill by making pre-tax contributions to your retirement plan or health savings account.
Gifts from your employer
If you received a token of appreciation for all your hard work last year, you might owe taxes on what you received. Gifts from an employer can get complicated, so “it’s safest to assume that anything of significant value is taxable,” Pritchard said.
Generally, employers can give you small items — think occasional snacks and holiday gifts — without reporting it as compensation.
But be careful with cash or valuable items, like gift cards or a vacation package. These could result in taxes, Pritchard said.
Stock compensation
Some companies include stock compensation as part of an employee’s benefits package or as a reward for a job well done. One form of stock compensation is the restricted stock award, where the company transfers shares to the employee and subjects those shares to a vesting schedule.