How Are Bonuses Taxed: Rates, Withholding, and Strategies

You worked hard for your bonus — but the check you receive will be noticeably smaller than the number your manager announced. Understanding exactly how bonuses are taxed helps you plan ahead, avoid April surprises, and potentially reduce what you owe.

The short answer: bonuses are taxed as ordinary income, but employers withhold using one of two methods. The most common is a flat 22% federal withholding rate, plus 7.65% for Social Security and Medicare and any state tax. The 22% is not a special "bonus tax" — it's a prepayment that gets reconciled on your annual return.

Use our Bonus Tax Calculator to estimate your net bonus from your pay, year-to-date wages, state, and W-4 filing status.

What comes out of a bonus check

Here is a $10,000 bonus for a single employee earning $75,000 a year, paid biweekly, with $60,000 already paid this year, in a state with no income tax (2026 rules):

The tax the bonus actually adds to this person's 2026 return is $2,200: with $75,000 of salary, taxable income after the $16,100 standard deduction is $58,900, and the whole bonus fits inside the 22% bracket, which runs to $105,700 for single filers. Under the flat method withholding is exactly right; under the aggregate method about $597 comes back at filing. Social Security and Medicare are final — they don't get refunded.

The Supplemental Wage Rule: Why 22%?

The IRS classifies bonuses as supplemental wages — compensation paid in addition to regular wages. Supplemental wages also include commissions, severance pay, tips, overtime, back pay awards, and retroactive pay increases.

When supplemental wages are paid separately from a regular paycheck, employers may use the optional flat withholding rate of 22% for federal income tax. This rate:

• Applies to the first $1,000,000 of supplemental wages in a calendar year
• Requires no W-4 information from the employee
• Is straightforward for payroll departments to implement
• Is set by the IRS — not chosen by the employer freely

The 22% rate is the IRS's approximation of the tax most workers with a bonus will actually owe. In practice, it's accurate for workers in the 22% bracket but results in under-withholding for high earners and over-withholding for lower-income workers.

The Aggregate Method: How Some Employers Calculate Withholding

Some employers add the bonus to a regular paycheck instead. IRS Publication 15 (section 7) describes it: add the supplemental wages to the regular wages for the payroll period, figure the withholding as if the total were a single regular payment, subtract the tax withheld from the regular wages, and withhold the rest from the bonus.

The aggregate method step-by-step:

1. Add the bonus to the regular wages for the current or most recent payroll period
2. Figure withholding on the combined amount with the Pub 15-T tables, which annualize it (multiply by the number of pay periods)
3. Figure withholding on the regular wages alone the same way
4. The difference is the withholding on the bonus

This method almost always results in higher withholding than the flat 22% rate — because combining a large bonus with a regular paycheck pushes the annualized income into higher brackets.

Example: Single filer (W-4 Step 2 not checked), biweekly paycheck of $3,000, receives a $15,000 bonus:

• Combined wages: $18,000 for this check, annualized to $18,000 × 26 = $468,000
• Pub 15-T 2026 subtracts $8,600 (line 1g) and applies the single table, which starts taxing above $7,500 — the same as taxing $468,000 − $16,100 = $451,900 with the 2026 brackets: $58,448 + 35% × ($451,900 − $256,225) = $126,934.25
• Regular wages annualized: $3,000 × 26 = $78,000 → $78,000 − $16,100 = $61,900 → $5,800 + 22% × $11,500 = $8,330
• Difference: $118,604.25 ÷ 26 ≈ $4,561.70 withheld from the bonus
• Compare to flat rate: $15,000 × 22% = $3,300 withheld

The aggregate method withholds about $1,262 more here, even though the bonus is actually taxed at 22% on this person's return. Neither method is wrong — both are allowed — and the excess comes back as part of the refund.

The $1 Million Threshold: Where 37% Kicks In

For very high earners or executives receiving large bonuses, the supplemental wage rules change above $1,000,000 in a calendar year:

• First $1,000,000 of supplemental wages: withheld at 22% (flat rate method)
• Amount above $1,000,000: mandatory withholding at 37% (highest marginal rate)

This applies regardless of the employee's actual tax bracket or W-4 elections — it's a hard requirement, not an option.

Example: $2 million year-end bonus:

• First $1,000,000: 22% = $220,000
• Second $1,000,000: 37% = $370,000
• Total federal withholding: $590,000

The aggregate method isn't available for the part over $1 million — the 37% rate is mandatory there.

Social Security applies only up to the 2026 wage base of $184,500. An executive with $500,000 of salary already paid has passed it, so the $2 million bonus owes no Social Security — but it still owes Medicare of 1.45% ($29,000) plus 0.9% Additional Medicare ($18,000), for $637,000 withheld before state tax.

Social Security and Medicare on a bonus

A bonus is wages for FICA purposes, so payroll takes:

• Social Security, 6.2% — only on the part of your year-to-date wages from that employer up to $184,500. If you've already earned $180,000, only $4,500 of the next bonus is taxed: $279.
• Medicare, 1.45% — on the whole bonus, no cap.
• Additional Medicare, 0.9% — your employer must withhold it on wages it pays you above $200,000 in the calendar year, regardless of filing status. If you've been paid $190,000 and receive a $20,000 bonus, only $10,000 is above the line: $90.

That last example in full (married filing jointly, flat method): $4,400 federal, $0 Social Security, $290 Medicare, $90 Additional Medicare, for a net bonus of $15,220 before state tax. The actual Additional Medicare tax is settled on Form 8959 using $250,000 for joint filers, $125,000 married filing separately, and $200,000 for everyone else — so a married couple may get that $90 back, and two high earners with separate employers may owe more.

Why 22% Withholding ≠ Your Final Tax Rate

This is the most important point for bonus earners to understand: the 22% withheld is not your actual tax on the bonus. It's an estimate, a deposit. Your true tax is determined by your marginal tax rate for the year.

These are the 2026 single brackets from IRS Rev. Proc. 2025-32; taxable income is after the $16,100 standard deduction or your itemized deductions.

A worker in the 12% bracket receiving a bonus gets back money at filing — the 22% withholding was too high. An executive in the 37% bracket using the flat rate method owes a significant additional amount.

If you're a high earner, consider making additional estimated tax payments after receiving your bonus, or asking your employer's payroll department to add extra withholding to your next few regular paychecks using Step 4(c) of your W-4.

Can You Contribute Your Bonus to a 401(k)?

Yes — if your 401(k) plan allows it. Most plans permit bonus contributions, but some only allow contributions from regular wages or require you to elect deferral percentages that apply to all compensation. Check your Summary Plan Description (SPD) or ask HR.

Contributing to a traditional (pre-tax) 401(k) directly from your bonus:

• Reduces your taxable income by the contributed amount
• Reduces federal (and state) income tax withholding on the bonus
• Does not reduce Social Security or Medicare taxes (FICA applies regardless)
• Counts toward your 2026 annual limit of $24,500 ($32,500 if age 50+, $35,750 at ages 60–63)

Example: $25,000 bonus. You elect to defer $10,000 to your 401(k):

• Taxable bonus for income tax purposes: $15,000
• Federal withholding (22%): $15,000 × 22% = $3,300 instead of $5,500
• Tax savings: $2,200 immediately; more potentially at filing if you're in a higher bracket
• FICA still applies to the full $25,000

Deferred Compensation Plans for Executives

For higher-earning employees, particularly at larger companies, Non-Qualified Deferred Compensation (NQDC) plans allow you to defer all or part of your bonus to future years — typically distributed in retirement when your income (and tax rate) may be lower.

Key features of NQDC:

• Pre-election required: You must make your deferral election before the performance year begins (usually by December 31 of the prior year)
• No contribution limits unlike 401(k) plans
• Unfunded and unsecured: The deferred compensation is a promise from the employer, not held in a separate account — if the company goes bankrupt, you're an unsecured creditor
• Taxes apply when distributed, not when earned or deferred

NQDC makes the most sense when you have strong confidence in your employer's financial health and expect meaningfully lower income in retirement. For executives in the 37% bracket deferring income they'll withdraw in the 24% bracket, the savings can be substantial.

Timing Strategies: December vs. January Bonus

If you have any say in when your employer pays your bonus, timing matters:

Reasons to take the bonus in December:

• Lock in current-year tax rates (relevant if rates are expected to rise)
• Make a final retirement account contribution before year-end
• Pair with a large charitable gift in the same year for a deduction that exceeds the standard deduction

Reasons to defer the bonus to January:

• Reduces current-year taxable income (useful if you're near a tax bracket cutoff, IRMAA threshold, or phase-out)
• Gives you time to set up a new retirement account (Solo 401(k), SEP-IRA for self-employed)
• Beneficial if your income will be significantly lower next year (retirement, sabbatical, maternity leave)

State Bonus Tax: How States Handle Supplemental Wages

States vary widely in how they tax bonuses:

No state income tax on bonuses: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming

States with a published supplemental rate: California withholds 10.23% on bonuses (6.6% on other supplemental wages). Several other states publish their own flat supplemental rate; others have employers use the regular withholding tables, often on the bonus plus a regular paycheck.

Check your state revenue department's employer withholding guide; the bonus tax calculator lets you override its state estimate with your state's published rate.

Important: State withholding from your bonus is also just an estimate. Your actual state tax on the bonus is determined on your state return at filing.

What Actually Happens at Tax Time

When you file your federal return:

1. Your bonus income is included in Box 1 of your W-2 — combined with regular wages
2. The total income is taxed at your actual marginal rates, using the standard brackets
3. Taxes withheld from both regular paychecks and your bonus are credited against what you owe
4. If total withholding exceeds your tax liability, you get a refund. If you under-withheld, you owe the balance.

There is no separate bonus tax rate on your return — the IRS simply sees total wages and total withholding. The supplemental rate is purely a payroll mechanism.

Ready to calculate how much of your bonus you'll actually keep? Use our Bonus Tax Calculator to enter your salary, bonus amount, filing status, and state for a detailed breakdown. Also use our Paycheck After Tax Calculator to see your regular take-home for comparison.