Should bonuses be taxed?


Fact Box

  • A bonus is “financial compensation that is above and beyond the normal payment expectations of its recipient,” usually given to employees at the end of a fiscal quarter or year. 
  • As of 2023, there are several federal income tax brackets with varying tax rates for different income earning groups: 10, 12, 22, 24, 32, 35, and 37%, with the top marginal income tax rate applying to taxpayers with income over $530,000.
  • USA Today reported in January 2023 that holiday and year-end bonuses shrank in 2022 due to “economic uncertainty” and economists forecast an oncoming recession
  • As of 2022 data, Zippia reports the average bonus pay for US employees is “11% of salary for exempt employees, 6.8% for nonexempt salaried employees, and 5.6% for hourly employees.”
  • CNN Business reports that the average Wall Street bonus increased 20% from $213,700 in 2020 to $257,500 in 2021.

Luis (No)

While taxes are necessary for every state to work properly, these can be unfair, especially when a hardworking employee's bonus (essentially a financial gift) is taxed on top of one's annual taxes. Bonuses are nothing more than an extra payment that, on principle, should not be taxed for several reasons. Firstly, taxing bonuses undermines the purpose of giving employees a fiscal reward based on their tenure or performance. It doesn't make sense to be gifted extra money that will be considerably less after taxes. Of course, it could also affect performance since bonuses are a way of recognizing hard work, and being taxed can make the person feel undervalued.

Another reason why bonuses shouldn't be taxed is because it could discourage employers from offering other bonuses to their workers or employees in the future, considering that the money they'll give as a reward will be considerably less in the end. We're talking about a significant act of unfairness since bonuses are not even part of the worker's or employee's regular income.

Moreover, bonuses are already subject to many other taxes, such as Medicare or Social Security, which can drastically reduce the employee bonus value. Finally, bonuses are not ongoing benefits like retirement plans or health insurance, considering that bonuses are a one-time payment in almost every case. Taxing bonuses will have plenty of consequences, inevitably undermining private companies as it negatively affects employers and workers. Taxes should exist for the sole purpose of funding national security and social benefits and keeping local communities safe and funded. Instead, it seems the IRS finds more and more ways to increase its ability to tax our hard-earned finances in multiple ways.

Andrew (Yes)

Bonuses are a common form of remuneration and, as such, should be taxed as part of the gross amount of income an individual earns. In theory, bonuses are paid to individuals to reflect a job well done and success in the workplace. If a person has a good year and that success is reflected in terms of their bonus, as well as the success of the business, this extra income should be taxed. These bonuses are often an expected part of an individual's annual income that people count on; it only makes sense that it should be taxed as well. This seems particularly logical when we consider that if someone didn't receive a bonus one year for any reason, they would not be liable for any additional tax. Additionally, bonuses are not required to be given according to any fairness. Favoritism, nepotism, and other workplace shenanigans should have no bearing on our national tax revenue.

Without taxation requirements, bonuses could easily become a commonly used form of tax avoidance. We all know this is money an individual earns through their employment. It doesn't matter whether you call it salary or bonus, it's payment to a worker for their work. If we didn't require bonuses to be subject to tax, employers would be free to pay employees the minimum wage and give the rest in bonuses. This would not only be a problem for the government in terms of tax revenue but also for employees, who would have no guarantee of knowing the amount of their annual salaries.

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