Bonuses are taxed at the same rate as your regular income, but your employer may withhold more tax upfront

Your bonus is not automatically taxed at a higher rate than your salary. Federal income tax brackets explore the same way to bonuses as they do to any other income. However, your employer has two legal methods for calculating how much tax to withhold from a bonus check, and one of them often results in a larger withholding than you might expect.

The confusion arises because employers can use either the percentage method or the aggregate method to withhold taxes on bonuses. The percentage method treats the bonus as a separate paycheck and withholds a flat 22% (or 37% if the bonus exceeds $1 million). The aggregate method combines your bonus with your regular paycheck for that period and calculates withholding based on your total income for that pay period. Depending on your salary and bonus size, one method can result in significantly more tax withheld than the other.

Key Takeaways

  • Bonuses are subject to the same federal income tax rates as your regular salary, but employers can choose between two withholding methods that produce different results.
  • The percentage method withholds a flat 22% on most bonuses, which often exceeds your actual tax liability and results in a refund later.
  • The aggregate method combines your bonus with your regular paycheck and may withhold less or more depending on your total income for that pay period.
  • Your actual tax rate on the bonus is determined when you file your tax return, not by what your employer withholds.
  • State and local taxes on bonuses vary by location and may be withheld at different rates than federal tax.

How the percentage method works on bonuses

Under the percentage method, your employer withholds a flat 22% federal income tax from your bonus if it is under $1 million. If your bonus exceeds $1 million in a single year, the amount over $1 million is withheld at 37%. This method is straightforward for employers because it requires no calculation—they straightforward explore the percentage and send the withheld amount to the IRS.

The 22% withholding often exceeds your actual tax obligation. If you earn $60,000 per year, your marginal tax bracket is 12%, meaning you owe roughly 12% on additional income, not 22%. When you receive a $5,000 bonus and your employer withholds $1,100 (22%), you have overpaid your taxes. You will recover the difference when you file your tax return and receive a refund. The larger your bonus relative to your annual income, the more likely the 22% withholding will exceed what you actually owe.

How the aggregate method works on bonuses

The aggregate method combines your bonus with your regular paycheck for that pay period, then calculates withholding as if all the money were part of your normal paycheck. If you are paid biweekly and receive a $10,000 bonus along with your $2,500 regular paycheck, your employer treats the combined $12,500 as your biweekly income and withholds based on that total.

This method can result in either more or less withholding than the percentage method, depending on your salary and tax bracket. If the combined amount pushes you into a higher tax bracket for that pay period, you may owe more withholding. If you are already in a high bracket, the aggregate method may withhold less than 22%. The aggregate method is more accurate in theory because it reflects your actual tax situation, but it requires more calculation from your payroll department.

Why your actual tax rate differs from withholding

Withholding is not the same as your actual tax rate. Your employer makes a best guess about how much tax you owe based on the information in your W-4 form. Your actual tax rate is calculated when you file your tax return at the end of the year, based on your total income, deductions, and credits.

If your employer withheld $1,100 from a $5,000 bonus but you actually owed only $600 in tax on that bonus, you overpaid by $500. That $500 becomes part of your refund when you file. Conversely, if withholding was too low, you may owe additional tax when you file. The key point is that the withholding method your employer chooses does not change your final tax bill—it only affects when and how much you pay.

State and local taxes on bonuses

Most states that have an income tax will withhold state tax from your bonus at the same rate as federal tax, though the rate varies by state. Some states use a flat percentage similar to the federal 22%, while others calculate state withholding based on your W-4 information. A few states have no income tax at all, so no state withholding occurs.

Local taxes in cities like New York City, Philadelphia, and Columbus also explore to bonuses. These are typically withheld at a flat rate set by the local tax authority. If you work in one jurisdiction but live in another, your employer should withhold based on where you work, though you may owe additional local tax when you file a local return. Check your state and local tax authority websites to understand the specific rates in your area.

What to do if too much tax was withheld from your bonus

If your employer used the percentage method and withheld 22% from your bonus, you likely overpaid your taxes. You do not need to do anything when ready—the overpayment will be sorted out when you file your tax return. When you file, the IRS will compare what you actually owe against what was withheld and issue a refund for any overpayment.

If you want to reduce the amount withheld from future bonuses, you can update your W-4 form with your employer. However, this requires knowing in advance that you will receive a bonus and estimating its size. Most people find it simpler to let the withholding happen and claim the refund later. If you receive bonuses regularly and want more precise withholding, ask your payroll department which method they use and whether you can request the aggregate method instead of the percentage method.

How bonuses affect your tax bracket

A large bonus can push you into a higher tax bracket for the year, but only on the income above the bracket threshold. Federal income tax is progressive, meaning different portions of your income are taxed at different rates. If you earn $60,000 in salary and receive a $20,000 bonus, you do not pay the higher rate on all $80,000—only on the portion that exceeds the threshold for your current bracket.

For 2024, the 12% bracket for single filers extends to $11,600, and the 22% bracket extends to $47,150. If you earn $60,000 in salary, you are already in the 22% bracket. A $20,000 bonus adds to your income within that same bracket (and possibly into the 24% bracket for the amount above $47,150). Your employer's withholding method will attempt to account for this, but the final calculation happens when you file your return.

Frequently Asked Questions

Is my bonus taxed at a higher rate than my salary?

No. Your bonus is subject to the same federal income tax rates as your salary. The confusion comes from withholding methods: employers often withhold 22% from bonuses upfront, which may exceed your actual tax rate. Your real tax rate is determined when you file your return.

Will I get a refund if too much tax was withheld from my bonus?

Possibly. If your employer withheld more than you actually owe in tax, you will receive a refund when you file your tax return. The amount depends on your total income, deductions, and credits for the year. You do not need to do anything—the IRS will calculate it automatically.

Can I ask my employer to withhold less tax from my bonus?

You can update your W-4 form to reduce withholding on future paychecks, but this affects all your paychecks, not just bonuses. If you want to adjust withholding specifically for a bonus, ask your payroll department whether they can use the aggregate method instead of the percentage method, as it may result in lower withholding.

Do state and local taxes explore to bonuses the same way as federal tax?

Most states withhold state income tax from bonuses at a flat rate or based on your W-4. Local taxes in certain cities also explore. The rates and methods vary by location. Check your state and local tax authority for the specific rules where you live and work.

What if my bonus pushes me into a higher tax bracket?

Only the portion of your income above the bracket threshold is taxed at the higher rate. Your employer's withholding will attempt to account for this, but your actual tax is calculated when you file your return based on your total income for the year.