Military Bonuses and Taxes

Whoohooo, I feel like I’ve opened a can of worms and I’ve only written the title.  I was doing some research on military bonuses, and I was amazed at the number of comments about the taxes on bonuses.  What struck me the most is that it seems that many people don’t understand how the taxes on bonuses work as part of the overall income tax structure.

I’ve seen comments such as:

 My wife got a $12000 enlistment bonus last year.It was taxed before she got it,She netted $9000.  Her income on her w2 was $9000 more than usual wich put us in a higher tax braket and gave us less than usual on our return.  Did we get double taxed,or should i say overtaxed.It seems like if we had already been taxed on the $12000 bonus it wouldn’t be taxed again when we file.  what am i missing here? forums

Funny thing, I was talking to my career jammer yesterday and he mentioned that you can get back the money they take from your bonus at the end of the year when you do your taxes. I’m not sure if it’s true or not, but definitely worth looking into.   Military Times forum

(comments quoted without editing)


Here’s the key to the whole thing:  bonuses are taxed like regular income.  There are taxes withheld on bonuses like there are taxes withheld on regular pay.  Because it would be impossible calculate the right amount of taxes for everyone who gets a bonus, taxes are withheld at a high rate, higher than the regular rate for most military taxpayers.  However, the amount of taxes that you ultimately pay for the year are the same, whether you get a bonus or whether you get a larger base pay.

How does that work?  When you file your income tax return at the end of the year, you add up all your taxable income and figure out how much you owe in taxes for the year.  Then you add up the money you’ve had withheld for the year, plus any credits, and figure out if you’ve withheld the right amount, or if you’ve withheld too much or too little.  It is nearly impossible to get withholding exactly right, so most people have either withheld too much and get a refund of their overpayment, or they’ve withheld too little and they owe more to pay the total tax bill.

Bonuses, especially large bonuses, can have a big impact on the amount of total tax that you owe for the year.  Therefore, taxes are withheld at a high rate on bonuses.  Withholding more on a bonus payment is a good way to ensure that individual taxpayers don’t get stuck needing to make large payments at the end of the year.

I hope I explained that clearly, and that you understand how taxes work and why taxes are withheld at a high rate on bonus payments.  If I’ve just made it more confusing, let me know and I’ll try to sort it out.

About the Author

Kate Horrell
Kate Horrell is a military financial coach, mom of four teens, and Navy spouse. She has a background in taxes and mortgage banking, and a trove of experience helping other military families with their money. Follow her on twitter @realKateHorrell.
  • guest

    One good way to avoid higher taxes at year end after a bonus is to greatly increase your contributions (by say at least your bonus amount) to your pre tax TSP :-) Serves two purposes, lower taxes and a boost in retirement pay!

    • KateKashman

      guest, you are very smart and absolutely correct. Contributing to a pre-tax TSP account is a great way to decrease your taxable income now AND increase your income in retirement. Great comment!

  • Guest

    How do you get a bonus??? I want one! Also, keep in mind if the AF starts handing out bonuses to get out at 15 yrs…be carefull. Bonuses will off set anything you recieve from the VA. In other words lets say you recieve $15K to retire early…you won’t start recieving VA benifits until it equals the $15K. So it’s like getting nothing!

    • Mary

      Navy Air Rescue Swimmers get a $10,000 bonus after the graduate FRAQ school.

      And then if you sign for an additional 2 years when you get outta boot camp you get an extra $2,000.
      thus totaling $12,000!

  • Debra

    My husband served 3 years out of a 6 year term in the Naval Reserves, after having receiving a $20,000 sign-on bonus (of which he received only $15,000 after they taxed him on it). They booted him out due to some technicality, and then wanted half of the bonus back, even though they taxed him $5,000. Now, they are keeping our income tax refund each year, and still adding fees/interest to the total due. It’s a never ending cycle and it’s hurting his credit. Is there any way to fight this so that he won’t have to pay crazy interest? This debt is never getting any smaller, in fact, it’s getting larger.

    • Quick

      Well sounds like your husband was either 1) unable to pass his PT tests (really sad considering the Navy is the easiest branch for PT) 2) was a disciplinary case (or didnt show up for drill) 3) or a cry baby who wanted out.

      • nick

        You can get seperated for not having a family care plan. Or….if you are a first termer and single with a kid or two, you have to give your kid to the other parent. If that doesn’t work out and you need to keep your kid….you can get seperated for that too.

  • Darrell

    Just to reiterate, his argument is that he should only owe $7,500, not $10,000 since he received $15,000 (which, at this point, because of all the late fees & interest this debt is now in excess of $13,000) .. what recourse does he have to halt the fees/interest and get this thing settled already?

    • guest

      He has none, he RECEIVED a 20k sign on bonus, the federal and state governments taxed him appropriately and that income was added to his household income in the year it was received and your income tax return should have reflected that pay in that year.

      He owes them back 10k. That being said, you may want to call them up and set up a monthly payment plan instead of just relying on them taking your tax returns, if he agrees to autodraft some collections companies will allow a reduced interest rate after X months of on time payments. If you do this set up a bank account with just his name on it and ONLY put in the amount of money for the payment each month to avoid the possibility of the loan company trying to steal all your cash.If you are not making monthly payments now your principle will NEVER decrease.

      If it has already gone to a private collection agency he theoretically could try to settle the debt for a lump sum, save up, offer them something like 5 or 6k, if they say sure…get it in writing and never ever ever loose that paper, there have been cases where the debt gets sold off to a company 5 years down the line and if you don’t have proof you paid off that debt and it was accepted they could hold you liable for it again

      In regards to the income tax returns you may want to speak to a tax preparer about filing “injured spouse” to protect your portion of the tax return from garnishment

      • Nick

        He can do an amendment on his taxes if he has the proper paperwork. Then you can re-figure the taxes to get the correct tax. He may get a refund from the feds.

        • guest

          from a dfas website:
          Please Note: The wages paid in error in the prior year remain taxable to the employee for that year. This is because the employee received and had use of those funds during that year. The employee is not entitled to file an amended return (Form 1040x) to recover the income tax on these wages. Instead the employee is entitled to a deduction (or credit in some cases) for the repaid wages on his or her income tax return for the year of repayment. DFAS will mail tax certificates for amounts repaid on out-of-service debts each January.

  • Debra

    Thank you so kindly for the reply! It is very helpful. And yes, the debt has since been turned over to the Department of the Treasury for collection. I have never even heard of an “injured spouse” form, but I did find it on the IRS website. Thanks again.

    • guest

      No problemo, make sure you are looking at injured spouse and not innocent spouse, you’ll need to talk to a tax prep to verify you qualify

  • Nick

    To the Responder “Quick”: First of all let me say that it is blind, ignorant, assuming scum-of-the-earth like yourself which lead a lot of people, myself included, out of the military.

    You have no idea as to what her husband’s situation was and why he was separated, but with your awe-inspiring knowledge of the universe you feel not only justified but compelled (it was after all 530 pm on CHRISTMAS DAY that you responded) to tell this poor woman who is obviously distraught and in a bad situation that it was her husband’s fault for either being unable to PT or being a “cry-baby” and wanting out. I cannot fathom the sickness of the soul of a man who has that response. Not to mention that she has a valid point, since now the government basically made a 25% investment on her and her husband, which I can assure you is much better than any rate of return an individual investor could hope to get in the market. So yes, to me a financial professional and former military man, it does seem a little unjust and cause for at least raising the question of “is there anything I can do”. But no, not to you. Not to a man who has nothing better to do on Christmas Day than ridicule and mock an unknown person and their situation. Well sir, I can only imagine from reading your brilliant comment that you were alone and probably drinking by yourself to try to mask the feelings of uselessness you normally hide behind your annoying boasting and bravado. You should be beat in public never allowed to procreate. I offer you two choices: stay in the military as it is the only place on the planet where people like you can thrive, or grow a soul and a personality quickly.

    To Debra: I’m terribly sorry you have found yourself in this situation and I wish you nothing but the best. Having received a bonus myself that I didn’t want only to find I had to pay back my income tax amount, I empathize with you and will pass along anything I can find of use.

    • nick

      He could have gotten seperated for a number of honorable conditions. Thanks for calling out this douche!

  • Lori

    Nick!! Thanks for calling him out!