Fortunate workers who are slated to receive their year-end bonus often find themselves surprised when the amount they receive is much less than what they originally thought it would be, writes Kelley R. Taylor for the Kiplinger.

The difference in the amounts is due to federal tax withholding and bonus tax rates.

While bonuses are considered taxable income, the IRS also considers them to be supplemental wages. Your employer has to follow payroll tax rules when paying supplemental wages and withhold a portion of those wages for taxes.

The bonus amount that is withheld depends on the withholding method used by your employer, which partly depends on how high your bonus is and how it is paid.

Your employer can use the percentage method, which is usually used when the bonus check and the paycheck are issued separately. If your bonus is under a million, your employer will automatically withhold 22 percent from the bonus for tax purposes. If your bonus is higher than a million, the flat percentage withheld by your employer would be 37 percent.

An employer can also use the aggregate method for withholding from supplemental wages. This usually takes place when regular pay and bonus pay are combined. In that case, the amount of tax that is taken out from the check with the bonus pay included is higher than usual.

Fred Hubler, CEO and Chief Wealth Strategist for Creative Capital Wealth Management, which offers accredited investments and retainer based advice says, “End of year bonuses are a good problem to have.”

“We help our clients plan for this added income by utilizing investments that can help reduce taxable income.”

It is also good to know that is not possible to avoid the tax on the bonus because your employer is required to withhold. However if you want to how much your taxes will be impacted by your bonus payment, the IRS provides a calculator that can help you estimate what your withholding will be before you file your tax return.

Read more about the year-end bonus taxing in the Kiplinger.

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