I’ve noticed a lot of cfrustration about taxes on military bonuses. That’s not surprising, because it IS frustrating if you don’t understand what’s going on, but it doesn’t have to be too hard to understand.
First, you have to have a firm grasp on how income taxes work. If you are not sure, then read How Income Taxes Work, and ask questions. Feeling good about regular taxes? Great.
Here’s the magic thing about taxes on military bonuses: adding a bonus just changes the numbers. Everything else is the same. Your income number goes up, and your withholding number goes up because you’ve had taxes withheld on the bonus.
The part that gets people frustrated is that there are two ways that an employer can withhold taxes on bonuses: at your regular rate, or at a flat rate of 22%. DFAS withholds at 22%. I’m not sure exactly why but I suspect it is because most people would rather have a little more withheld than not enough. But regardless of why, that’s how it is done.
So when you get that bonus, it’ll have 22% withheld for federal taxes. And a lot of people look at that and say, “Bonuses get taxed at a higher rate.” But that’s not right. What’s true is that bonuses have taxes withheld at a higher rate. But the amount that you’ll actually pay in taxes isn’t determined until you file your income tax return the following year, and then your bonus (and bonus withholding) is lumped in with all your other income and all your other withholding. And if that 22% was too high, then either it will offset any amount that you would have owed, or you’ll get a larger tax refund.
Here’s an example of a service member who gets a $10,000 bonus that has $2,200 in taxes withheld from the payment. Everything else remains the same, except his income is higher, increasing his taxes, and his withheld amount is higher.
In this sample, the taxpayer had $2,200 withheld from the bonus payment, but had an additional $439 in their tax refund, so they really only paid $1,761 in taxes on that $10,000 payment. Obviously, every single tax situation will be different, but this gives you a rough idea how it works.
A couple of things to think about:
Bonuses in a Combat Zone
If you are able to receive your bonus while you are located in a Combat Zone Tax Exempt area, then you won’t owe federal income taxes on that money. Schwing!
Bonuses Saved for Retirement
Bonuses can be put into retirement savings accounts such as the Thrift Savings Plan (TSP) or an Individual Retirement Arrangement (IRA). If you put it into a Roth account, it won’t give you any tax benefit now, but it will grow tax-free and distributions later will be tax free. If you use a traditional account, you won’t be taxed on that money now but future distributions will be taxable.
You Can Save More If You’re In A Combat Zone
If you are in a Combat Zone Tax Exempt area, you can contribute above the usual limit. There are some tricky rules about contributions, because of the ways that different rules work together. Doug Nordman has done a great job of explaining it in this article: Maximizing Your TSP Contributions in a Combat Zone . Get some help if you’re a super-saver who is going to exceed the yearly limits.
If you have questions about other aspects of military enlistment and re-enlistment bonuses, see Ryan’s great post at The Military Wallet: Enlistment and Reenlistment Bonus Guide – Everything You Need to Know about Bonuses.
Still confused about taxes on military bonuses? Ask questions in the comments. I’ll answer them for you, plus update this post to make it more clear.
For more information on military tax issues, you might enjoy:
Understanding The Military Spouses Residency Relief Act and How It Applies To State Taxes
What Military Moving Expenses are Tax-Deductible?
Understanding Depreciation Recapture Taxes on Rental Property
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when you reenlist in a combat zone, only the installment you receive while in country is tax free, not the entire bonus. I just got off the phone with DFAS and was informed of this.
When I reenlisted while deployed the entire amount was tax free (the half that I received up front while in the combat zone and the later installments, even though I was not deployed when I received them).
I’m considering the LRP option when enlist in the military. Currently, I have 63,000 in stundent loan debt. With the active duty army paying 33.3% of my balance every year, how much taxes will be taken out of my payments?
I’m assuming that it would be in the 25% tax bracket with about 3000 in taxes taken out for payment.
I understand that military pay in a combat zone is tax free only up to ~$8,200 per month with pay above that amount subject to tax. Does this also apply to bonuses received during combat deployment? For example: base pay is $6,200 per month, I also receive a $25,000 health professional bonus for commuting to extra time. Will the bonus be tax free?
I see you posted this in 2017. What was the outcome? Was your bonus tax while deployed?
When I reenlisted in 2012 in Afghanistan I received 35,000 tax free all at once.
I enlisted in Oregon but PCS’ed to Ft Hood Texas. I had a $10.000 bonus. I only received $6,600. I understand the IRS takes 25% as tax. Does the State also take a cut as taxes. My State tax from that pay period rose to $986 from the usual $111 to $986. Is there State tax on bonuses and if so, what percentage does the state take out as Tax ?
The IRS requires tax withholding at 25% – it isn’t an actual tax bill but a pre-payment on the estimated total yearly tax. Many states also require withholding on bonuses. The amount would depend on the state.
I received two bonuses last year and both were taxed. I was told by my career counselor that I will be able to get what was taxed, back during tax return season. Is that true? Some are saying I won’t see the money that was taxed.
Everyone’s tax situation is different. Most military service members see most of the withheld taxes refunded at tax time, but that’s not true for 100% of cases. It depends on your overall income, family size, credits you may be able to claim, and most importantly, your total withholding for the year (regular withholding plus bonus withholding.) I’d be glad to help you go over your tax return and explain your specific situation to you.
If I am stationed in gorgia and relieved a bonus did I pay gorgia state tax and NY State tax if my home of record I’d ny
Jdon, you had taxes withheld for your state of legal residence as listed on your LES. Whether you actually “paid” any taxes depends on a wide variety of factors including your state tax law and particular situation.
Are sign on bonuses garnishable by the government and if so how much can they take?
Do you pay payroll taxes on military bonuses? I.e. 6.2% social security + 1.45% medicare = 7.65% ?
Thanks!
Yes, bonuses are regular earned income and are subject to payroll taxes, as well as state and federal income taxes.
Just a point out, they should only be withholding 22% in 2018, not 25% like 2017 and prior. https://www.irs.gov/publications/p15#en_US_2018_publink1000202352
Thanks for the link, Brian!
“Bonuses can be put into retirement savings accounts such as the Thrift Savings Plan (TSP) or an Individual Retirement Arrangement (IRA). If you put it into a Roth account, it won’t give you any tax benefit now,”
Putting a percentage of my bonus into TSP would not lower my taxable income? I understand the bonus will be taxed a percentage no matter what, but wouldn’t it lower the overall taxable income?
My husband got a military bonus and we were taxed on it, now that he is retiring they are making us pay it back and withdrawing from he’s retirement taxed again, can they do that? So we basically paid taxes twice on this amount.
Lynda, there is a way to reclaim this on your taxes, but it is complicated. You’re going to want professional help with this. https://www.military.com/paycheck-chronicles/2014/11/05/bonus-repayment-gets-messy
Currently deployed to Qatar, a tax free zone, I’m receiving the first half of my 20,000$ bonus while I was here. Is this going to be tax-free since I am in a tax-free zone?
Tony, have you received your bonus since posting this ? I am wondering the same thing. I re-enlisted stateside but supposed to receive my bonus next month. I’ve read two sources that say if in tax free zone you’ll receive you bonus tax free along side them saying reenlisting in tax free zone gets it tax free. Let me know if you know now. Thanks.
Currently deployed in a combat zone. I received my reenlistment bonus, it was taxed but I recently got those taxes back. I reenlisted while stateside though. Am I entitled to my bonus being taxed free, or am I going to have pay these taxes back because DFAS messed up
My husband received a bonus for re-enlistment in 2018 which we were taxed on up front. He is an E-6 with 3 dependents, at the time 9 years of svs, and no other income. Should we have filed to recoup some of the tax we paid on that bonus? It did not show up as income on our W2 for 2018 nor is it showing up as income for 2019.
Marie, I assume when you say “taxed up front,” you mean that taxes were withheld? Both the bonus and the withholding should have been reported on the W-2. If it did not, you need to contact DFAS to get the W-2 amended to show both the income and withholding, and then file an amended tax return. It is entirely possible that you will receive a refund of a portion of the taxes withheld once you go through the process to get an accurate W-2 for the year in which the bonus was paid.
Hi, I reenlisted while in a tax exempt zone and my payments are split up 2500 every year. I get sent a 1099 every year, does this mean that it is taxable once I left the tax exempt zone? I was told since I signed my contract while there then the whole thing would not be taxed but I have no idea how to prove that. Thank you
Hello, I will be receiving a reenlistment bonus after I complete my re-class training for another MOS. I was wonder how much of that bonus will I actually see. I understand that it will be taxed 22% federally, but I am unable to find anything stating how much NC will withhold.
How does it effect your tax bracket? Does it effect it at all or how does this work?
It affects your tax bracket just like any other income would – it remains the same up to the limit for that bracket, and the additional amount is taxed at the next higher level.
I received a “type 3” enlistment bonus of $20,000, and federal and state income taxes were withheld, however no FICA taxes were withheld. Do I have to pay FICA taxes on that, and if so, why wasn’t it withheld up front?
Good question, Jim! I can’t remember clearly off the top of my head, so I’m going to ask around! Let me see what I find out.
I’m also very interested in this. Everything I’m reading states that bonuses should be taxed like normal income, including FICA, but I’ve reached out to military finance, and they gave me a worksheet stating that I’d be taxed at 25% (pretty sure it was just outdated and should have said 22%) before my ROTH TSP contributions.
This is especially important for ROTH TSP contributions since I can only allot a percentage of my “after deduction” bonus to ROTH TSP in MyPay.
Finally, if the military doesn’t deduct the FICA taxes from the bonus, does that mean I will owe that bill (7.65% of bonus) and need to set that money aside for when I file my taxes next year?
I received the following reply from Air Force finance:
“The only deductions made from bonuses and one-time special pays are federal income tax withholding (FITW), and state income tax withholding (SITW).”
This doesn’t specify whether or not I will owe back taxes for FICA when I file my taxes next year.
Eric, special and incentive pays (including bonuses) are not subject to FICA tax. You can find this listed in the Social Security POMS manual. Here’s the right section: https://secure.ssa.gov/apps10/poms.nsf/lnx/0500830540 Apparently I can’t insert a screenshot here, but I recommend finding it by doing a search for “bonus.”
Thank you so much!