How are bonuses classified in terms of taxable income?

Study for the 10 Hour Federal Tax Law Exam. Review flashcards and multiple choice questions, each with hints and explanations. Get exam-ready with our comprehensive materials!

Bonuses are classified as supplemental wages for tax purposes. This classification is important because it dictates how the IRS requires employers to withhold taxes on these payments. Supplemental wages include bonuses, commissions, overtime pay, and other forms of additional compensation provided by an employer.

The treatment as supplemental wages allows employers to use specific withholding methods, which can differ from the withholding applied to regular salary or wages. For instance, employers may withhold a flat percentage on bonuses rather than applying the standard withholding tables. This streamlined approach helps ensure that tax obligations are met efficiently and accurately.

Understanding that bonuses are supplemental wages also underscores the fact that they are still part of an individual's gross income and subject to taxation, thus emphasizing their nature as ordinary income rather than capital gains or exempt income. Capital gains, on the other hand, pertains to profits earned from the sale of assets, while exempt income refers to income not subject to taxation.

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