How Are Bonuses Taxed in Oregon? Federal & State Rules

A bonus represents additional compensation an employer provides to an employee beyond their regular wages or salary. These payments often acknowledge strong performance, company profitability, or achieving specific goals. While a welcome addition to income, bonuses are not exempt from taxation and are subject to various federal and state tax rules, similar to regular earnings. Understanding how these payments are taxed is important for financial planning and anticipating net pay.

Federal Income Tax Withholding on Bonuses

For federal tax purposes, bonuses are categorized as “supplemental wages.” Employers follow specific rules for withholding federal income tax from these payments. Two primary methods are used for federal income tax withholding on supplemental wages. The percentage method withholds a flat 22% from supplemental wages up to $1 million within a calendar year. This method is frequently applied when bonuses are paid separately from regular wages.

Alternatively, employers may use the aggregate method, which involves combining the bonus amount with the employee’s regular wages for a pay period. Federal income tax withholding is then calculated on this combined amount as if it were a single payment. This method often results in higher withholding for that specific pay period, reflecting the larger temporary income.

Beyond income tax, bonuses are also subject to Federal Insurance Contributions Act (FICA) taxes, which fund Social Security and Medicare. Social Security tax is withheld at a rate of 6.2% from wages, including bonuses, up to an annual wage base limit. Medicare tax is withheld at a rate of 1.45% from all wages, with no wage base limit. An additional Medicare tax of 0.9% applies to wages exceeding certain thresholds for higher-income earners.

Oregon State Income Tax Withholding on Bonuses

Oregon state income tax withholding on bonuses follows a different approach than the federal flat rate method. Oregon requires employers to withhold state income tax from supplemental wages, such as bonuses, consistent with regular wages. The withholding calculation considers the employee’s Oregon W-4 (Form OR-W-4) and the state’s current tax tables. There is no specific flat supplemental wage withholding rate at the state level in Oregon. Employers calculate this withholding using the same methods applied to regular paychecks, ensuring consistency in state tax collection.

Oregon also imposes a Statewide Transit Individual Tax (STT) on wages, which includes bonus payments. This tax is withheld from an employee’s gross wages and contributes to funding public transit services across the state. The STT is a separate withholding from the standard Oregon income tax and applies to nearly all types of compensation.

How Bonuses are Reported and Impact Your Annual Taxes

Bonus income, along with its associated federal and state tax withholdings, is reported on your annual Wage and Tax Statement, Form W-2. The total amount of your bonus is included in Box 1, “Wages, tips, other compensation,” representing your gross taxable income for federal purposes. Federal income tax withheld from your bonus and other wages appears in Box 2. Oregon state income tax withheld is reported in Box 17, “State income tax.”

While employers are required to withhold taxes from bonuses, this withholding is an estimate of your ultimate tax liability. The actual federal and Oregon state income taxes owed on your bonus, and all other income, are determined when you file your annual tax returns. This final calculation considers all income sources, deductions, credits, and the applicable tax rates for the entire tax year.

Receiving a bonus can sometimes push a taxpayer into a higher marginal tax bracket for the year, potentially leading to a larger overall tax bill than initially anticipated. Even with proper withholding, the additional income from a bonus might reduce the amount of a tax refund or even result in taxes due at the time of filing. It is important to review pay stubs and understand how bonus income affects total annual earnings.