Have you recently received a bonus from your employer? While bonuses can be a welcome boost to your income, they often come with questions, and surprises, at tax time. Understanding how bonuses are taxed and withheld can help you plan more effectively and avoid confusion.
Why Do Bonuses Seem to Be Taxed More?
The Internal Revenue Service (IRS) classifies bonuses as supplemental wages. Because of this, employers often withhold federal income tax from bonuses at a flat rate, which can make bonuses feel like they’re taxed more heavily than regular pay.
It’s important to note that withholding is not the same as the tax you ultimately owe. Bonuses are not taxed differently than regular wages when you file your tax return. Instead, the higher withholding is meant to prepay taxes on income that could push you into a higher tax bracket.
Federal Bonus Withholding Rates
For federal income tax purposes, employers generally use one of two methods to withhold taxes on bonuses. The most common is the flat-rate method:
- 22% federal withholding on supplemental wages up to $1 million
- 37% federal withholding on any supplemental wages above $1 million
These rates apply only to federal income tax withholding, not to the total tax owed.
Other Taxes That Apply to Bonuses
In addition to federal income tax, bonuses are typically subject to:
- Social Security tax (6.2%), up to the annual wage base
- Medicare tax (1.45%)
- Additional Medicare tax (0.9%) for higher earners
- State and local income taxes, depending on where you live
State rules vary widely. Some states apply a flat supplemental wage rate, while others treat bonuses the same as regular income.
How Tax Withholding Works
Tax withholding is the process by which employers deduct taxes from your pay and send them to tax authorities throughout the year. When a bonus is paid, employers may withhold taxes at higher rates to account for the possibility that the additional income increases your overall tax liability.
Because of this, the net amount you receive from a bonus may be significantly less than the gross amount—even though your final tax bill may be lower once you file your return.
Can You Reduce the Taxes on a Bonus?
While taxes on bonuses can’t be avoided entirely, thoughtful planning may help reduce their impact:
- Increase retirement contributions, such as to a 401(k), if eligible
- Make charitable contributions if aligned with your goals
- Review your overall withholding by updating your W-4 to better match your annual income
- Plan ahead for cash flow, especially if your bonus is large or irregular
In some cases, negotiating non-cash compensation, such as additional paid time off or employer-provided benefits, may also help align compensation with personal priorities.
What Are Supplemental Wages?
Supplemental wages are payments made in addition to regular salary or hourly wages. These commonly include:
- Bonuses
- Commissions
- Severance pay
- Certain incentive payments
The IRS treats supplemental wages as taxable income and applies specific withholding rules, which is why bonuses are often withheld differently than regular pay.
Managing Your Overall Tax Burden
A bonus can significantly increase your total income for the year, which may affect your marginal tax rate or eligibility for certain deductions and credits. Reviewing your tax situation early—especially after receiving a bonus—can help prevent surprises at filing time.
Understanding how bonuses are taxed allows you to make informed decisions, manage cash flow, and align your compensation with your broader financial plan. As always, consider consulting a qualified tax or financial professional to evaluate how a bonus fits into your overall strategy.
