How Bonuses Are Taxed

Getting a bonus is good news, right up until you see how much smaller the deposit is than the number on the offer letter or the announcement email. That gap isn’t your employer shortchanging you. It’s withholding, and it works differently from your regular paycheck. Here’s what’s actually happening to that money before it reaches your account.

Bonuses are “supplemental wages,” not regular pay

The IRS treats a bonus as a supplemental wage: income paid outside your normal, regular hourly or salaried pay. Commissions, severance, and back pay fall into this same bucket. Because supplemental wages don’t fit neatly into the regular payroll withholding tables (the ones based on your W-4 and pay frequency), the IRS gives employers a shortcut.

That shortcut is a flat 22% federal withholding rate on supplemental wages up to $1 million in a calendar year. Most employers use this flat rate because it’s simple to apply and doesn’t require recalculating your regular paycheck’s withholding. Above $1 million in supplemental wages in one year, the rate jumps to 37% on the excess, though that threshold applies to very few people.

There’s a second, less common method: the aggregate method, where your employer adds the bonus to your most recent regular paycheck and withholds as if that combined amount were your normal pay for the period. This usually pushes more of the bonus into a higher withholding bracket than the flat method would, which is why most employers stick with the flat 22% instead.

Whichever method your employer uses, remember this is withholding, not your final tax bill. What actually gets withheld from the check is just money on account. What you actually owe is settled when you file your return.

The formula

Tax Withheld = Bonus Amount x (Withholding Rate / 100)
Net Bonus    = Bonus Amount - Tax Withheld

The withholding rate is either the flat 22% federal supplemental rate, or a custom rate you set yourself to account for state withholding, additional federal withholding, or a different method your employer uses. If your state also taxes supplemental wages (many do, at their own flat or standard rate), you add that on top of the 22% to get a realistic custom rate.

Worked examples

Say you get a $5,000 bonus and your employer withholds at the flat 22% federal rate:

• Tax withheld: $5,000 x 0.22 = $1,100.00
• Net bonus: $5,000 - $1,100.00 = $3,900.00

Now say you get a smaller $2,000 bonus, but you know your state adds its own supplemental withholding on top of the federal rate, so you use a custom combined rate of 30% instead:

• Tax withheld: $2,000 x 0.30 = $600.00
• Net bonus: $2,000 - $600.00 = $1,400.00

Notice that doubling the withholding rate (22% to something closer to 44%, say) doesn’t cut your net bonus in half, since the untaxed portion of the bonus doesn’t shrink at the same pace as the withheld amount grows relative to the total. Running a few rates side by side is the fastest way to see how sensitive your take-home amount is to the assumption you plug in, which is exactly what the calculator’s custom rate option is for.

Why your actual tax bill can differ from what’s withheld

The flat 22% rate is a withholding convenience, not a tax bracket. Your real federal tax rate on that bonus income depends on your total taxable income for the year, added on top of everything else you earned. If your marginal tax rate is above 22%, for example because the bonus plus your regular income pushes you into a higher bracket, you’ll likely owe more than what was withheld when you file. If your marginal rate is below 22%, you may get some of that withholding back as part of your refund.

This is why a big bonus sometimes comes with a surprise at tax time in either direction. The withholding amount is a reasonable estimate for most middle-income earners, but it’s not calibrated to your specific bracket, your deductions, or any other income you have that year. If you want a more precise answer, a tax professional (or your own projection using your marginal rate as the custom withholding rate) will get you closer than the flat 22% assumption alone.

It’s also worth remembering that withholding and total tax owed are two different numbers even outside of bonuses. Your regular paycheck withholding is an estimate too, it just happens to be closer to your actual liability more often because it’s based on your W-4 elections and expected annual income, rather than a flat rate applied to a single lump payment.

FAQ

Is 22% my actual tax rate on the bonus? No, it’s just the withholding rate most employers use for federal taxes on the paycheck. Your real tax liability depends on your total income for the year and is settled when you file your return, potentially as a refund or additional amount owed.

Does the flat 22% rate include state taxes? No, the flat 22% option is federal only. If your state also taxes supplemental wages, you’ll want to add your state’s supplemental withholding rate on top of 22% and use that combined figure as a custom rate.

Will a big bonus push my whole paycheck into a higher tax bracket? Not your whole paycheck, and not permanently. Tax brackets are marginal, so only the income within a given bracket is taxed at that bracket’s rate. A large bonus can mean more of your total annual income lands in a higher bracket, which is one reason actual tax owed can differ from the flat withholding amount, but it doesn’t retroactively raise the rate on income you’d already have earned anyway.

Use the Bonus Calculator to run your own numbers.