How Am I Taxed If I Am A US Citizen Working Abroad?

international tax consultants maryland

If you are a United States citizen who lives and works overseas, you might be wondering if you must pay U.S. income taxes or how you will be taxed. If you are a U.S. citizen or a resident alien who lives elsewhere in the world, regardless of where you live your income received from around the world is subject to U.S. income taxes. There might be exclusions or credits that apply. To learn more about these credits and exclusions, refer to Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad.

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Tax-Treatment of Year-End Bonuses

tax treatment of year end bonuses

Many employers offer Christmas bonuses or year-end bonuses to motivate their employees. Depending on how the bonus gets paid to the employee, it can affect the employee’s tax return and the tax withholding process. One of the main questions both employers and employees face is – “Are bonuses treated as regular income or are they singled out to be treated differently for tax purposes?”

The Internal Revenue Services (IRS) categorizes different kinds of income and treats the different types of income differently. Bonuses are classified separately according to IRS guidelines. The IRS defines special wages as compensation paid in addition to the regular wages of the employee.

This compensation might include back pay, vacation pay, moving expenses, dismissal or severance pay, fringe benefits that are taxable, overtime, and bonuses. Because of this, bonuses aren’t treated like regular wages as far as withholding taxes when paying the bonus. There are two ways taxes are withheld from an employee bonus – either the aggregate method or the percentage method.

Using the Percentage Method

The IRS specifies that a “supplemental rate” at a flat 25 percent be applied to tax supplemental wages, such as bonuses. If a bonus is $5,000 then according to this rule, 25% of that amount, which would be $1,250 of it, should be sent straight to the IRS for taxes. When using this approach, the employee bonus is separated from the rest of the employee’s income and taxed directly. Often, employers use the percentage method because is it easier to use a uniform rate to tax the entire bonus.

Using the Aggregate Method

Use this approach when you pay the bonus along with the regular paycheck. As the employer, you will determine the withholding amount based on the IRS withholding tables for both amounts, subtracting what was withheld from the employee’s last paycheck then withholding the rest of the bonus amount. For example, if the employee’s regular paycheck is $2,800 and you gave the employee a $5,000 bonus, then you put it into a $7,800 lump sum, the aggregate method would be used for taxes.

How Do High-End Bonuses Mean Higher Taxes?

If the employee gets a high-end corporate bonus that exceeds $1 million, it is subject to higher taxes. The employer will be required to withhold 39.6% of the amount that exceeds $1 million plus the standard 25% for the amount below the $1 million thresholds.

In Conclusion

If you have questions about taxing employee bonuses, you should contact a tax professional at MKS&H. We would be happy to meet with you and discuss your needs and the best option for your business when it comes to employee bonuses and the tax process.

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