Bonus Tax Rate: How Are Bonuses Taxed?

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If you’ve ever gotten a bonus at work, you can probably relate to the feeling of excitement and anticipation as you think of all the things you could do with it. But that joy is often replaced by disappointment when you receive your bonus and see just how much was taken out in taxes.

Are bonuses taxed differently? Because the IRS doesn’t consider bonuses to be regular wages, they’re subject to unique withholding rules that could result in you receiving a smaller amount than you expected. Here’s a look at how those withholding rules work and what that means for your tax liability.

How Much Are Bonuses Taxed?

In most cases, the bonus tax rate is a flat 22%. But the amount of tax you’ll ultimately pay on your bonus is equal to your effective tax rate.

Bonuses on your paycheck are treated like other types of income in some ways, meaning they’re subject to income taxes and FICA taxes. However, the IRS requires that employers treat bonuses differently for tax withholding purposes. This is because bonuses, according to the IRS, are considered supplemental wages, which simply means they aren’t regular wages.

Supplemental Wages

In addition to bonuses, other forms of compensation that are considered supplemental wages include:

• Commissions
• Overtime pay
• Severance pay
• Awards and prizes
• Back pay
• Accumulated sick leave
• Retroactive pay increases
• Reported tips
• Non-deductible moving expenses
• Fringe benefits

Tax Withholding on Supplemental Income

Depending on the method used by your employer, you could owe different amounts for your taxes. Supplemental wages are treated to the two following tax withholding rules.

The Percentage Method

The percentage method is how your bonus is likely to be taxed if it’s given on a separate paycheck from your regular wages.

Assuming you receive less than $1 million in supplemental wages throughout the year, your bonus will be subject to a flat withholding rate of 22%. So a $3,000 bonus, for example, would be subject to $660 of tax withholding.

If you receive more than $1 million in supplemental wages — which isn’t the case for most people — then your bonuses will be subject to withholding at 37%. In this case, that same $3,000 bonus would have $1,110 withheld.

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The Aggregate Method

The aggregate method is used when an employer pays a bonus on the same paycheck as your regular wages. This method is more complex and usually results in a higher percentage of taxes being withheld.

When using the aggregate method, an employer must combine your bonus and your regular wages and calculate your taxes as if that’s the amount you earn each paycheck.

For example, let’s say your regular income is $5,000 per month. But in December, you get a Christmas bonus of $1,000. Your employer doesn’t withhold your normal tax rate on your wages and 22% on your bonus. Instead, they do the following:

• Add your wages and bonus together for a total monthly income of $6,000.
• Multiply that monthly income by 12 to assume that’s how much you earn year-round.
• Calculate your marginal tax rate based on the newly calculated income of $72,000 rather than your actual annual income of $60,000.
• Subtract the tax already withheld from the regular wages and withhold the remaining amount from the bonus.

Depending on your income, the aggregate method could result in you paying a considerably higher amount in taxes than you would otherwise need to. In that case, there’s a good chance you would get some of that money back the following year in the form of a tax refund.

Federal Tax Withholding vs. Taxes Owed

Here’s where things get even more confusing. Bonuses and other supplemental wages have different withholding rules than regular income. But they aren’t actually taxed differently. Instead, bonuses are ultimately taxed at your effective tax rate, just like the rest of your income.

Say you have an annual income of $50,000 and a marginal tax rate — meaning the rate at which your highest income is taxed — of 22%. 

But when you account for your standard deduction and the fact that most of your income is taxed at lower rates, your tax liability is much lower. If your effective tax rate turns out to be 10%, then your regular income and bonus tax rate are at roughly 10%.

In that case, if your boss withheld 22% of your bonus, as the IRS requires, then you may end up getting a tax refund for overpayment of your income taxes.

Preparing for a Bonus: Tips To Know

A bonus can be an extra chunk of money you weren’t planning on, and can help reach your financial goals or pad your savings. However, in other cases, a bonus might be money you’re banking on for a specific purpose or even to help you pay your bills. Either way, it’s good to know how bonus tax withholding will work compared to your regular paychecks. Here are some helpful tips to prepare for a bonus.

Find Out How You’ll Get the Bonus

To prepare for your bonus taxes, you can start by asking your employer whether the bonus will come in a separate payment or attached to your normal wages. You may even be able to request that the bonus be paid separately so you can more easily estimate the taxes.

From there, you’ll have a better idea of how much money you’ll receive. For example, if you know you’re getting a $2,500 bonus as a separate payment, you can plan for $550 of it to be taken for withholding taxes. That way, you won’t make bigger plans for the money than what it can actually pay for.

Consider Your Tax Bracket

Another consideration is whether a bonus will push you into a higher tax bracket. If you’re on the cusp of two tax brackets and get a large bonus, you may end up paying a bit more in taxes on all of your income, not just your bonus.

Reduce Your Tax Liability

Finally, consider whether there are ways you can reduce your tax liability. Not only will this help reduce the taxes on your bonus, but it could also help keep you in a lower tax bracket. Here are a few ways to do that:

• Defer your bonus check: If you’re having a particularly high-income year or are on the end of two tax brackets, you may be able to request that your employer defer your bonus until the new year.
• Contribute to pre-tax accounts: Pre-tax accounts include 401(k) plans, traditional IRAs and health savings accounts (HSAs). The money you contribute to them reduces your taxable income and, therefore, your tax liability.
• Take advantage of other deductions: There are plenty of deductions available, and it’s important to make sure you’re claiming all of yours. An accountant or good tax software can help you ensure you’re claiming all the deductions you’re eligible for.

Final Take To GO

It can be disappointing to get excited about a bonus only to see a much smaller number than you expected on the check. So are bonuses taxed higher? While it’s true the amount being withheld from your bonus may be subject to special withholding rules that make it appear that you’re being taxed at a higher rate, that’s not actually the case. Once you file your income tax return the following year, you’ll find your bonus is taxed just like everything else.

So if your bonus tax rate is higher than you expected, don’t get discouraged. You may see that money come back around in the form of a tax refund.

Caitlyn Moorhead contributed to the reporting for this article.

Information is accurate as of Feb. 28, 2024.

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