How Are Bonuses Taxed: Rates, Withholding, and Strategies

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 specific methods. The most common is a flat 22% federal withholding rate. But 22% withholding is not a special "bonus tax" — it's simply a prepayment estimate that gets reconciled on your annual return.

Use our Bonus Tax Calculator to see your exact net bonus amount based on your salary, state, and filing status.

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 don't separate the bonus from regular payroll — they add the bonus to your most recent regular paycheck and withhold taxes on the combined amount as a single paycheck.

The aggregate method step-by-step:

1. Add the bonus to your most recent regular paycheck wages
2. Annualize the combined amount (multiply by the number of pay periods)
3. Calculate federal income tax on the annualized total using your W-4 elections
4. Subtract the annualized tax attributable to your regular wages alone
5. Divide the difference by pay periods to get the withholding on the bonus portion

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, biweekly paycheck of $3,000, receives a $15,000 bonus:

• Combined wages: $18,000 (for this check)
• Annualized: $18,000 × 26 = $468,000
• Tax on $468,000 (single, 2026): ~$136,000
• Tax on regular wages annualized ($78,000): ~$12,400
• Difference attributable to bonus: $123,600 / 26 ≈ $4,754 withheld
• Compare to flat rate: $15,000 × 22% = $3,300 withheld

The aggregate method withholds $1,454 more in this example. Neither method is wrong — they're both legally acceptable IRS approaches.

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

Note: Social Security tax applies only up to the $176,100 wage base. By the time a $2 million bonus is paid, most high-salary employees have already exceeded that threshold with regular wages, so Social Security typically does not apply to the bonus FICA calculation.

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.

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 $23,500 ($31,000 if age 50+)

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 flat supplemental rate:

• California: 10.23% supplemental withholding rate
• New York: applies highest bracket rate for supplemental wages

States that use the aggregate method: Most states require withholding on combined wages, similar to the federal aggregate approach.

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.