Yes, bonuses are taxed as ordinary income

Your employer withholds federal income tax, Social Security tax, and Medicare tax from bonuses the same way they do from your regular paycheck. The bonus itself is not taxed at a different rate than your salary — it counts as ordinary income and is subject to the same tax brackets and withholding rules. The only difference is how much your employer takes out upfront.

Your employer has two legal methods to withhold taxes on a bonus. The percentage method treats the bonus as a separate payment and withholds a flat 22 percent federal income tax (or 37 percent if your total bonuses for the year exceed $1 million). The aggregate method adds the bonus to your regular paycheck and calculates withholding based on your combined income for that pay period. Most employers use the percentage method because it is simpler.

The withholding your employer takes out is not necessarily the final amount you will owe. If too much is withheld, you get a refund when you file your tax return. If too little is withheld, you may owe more tax at filing time.

Key Takeaways

  • Bonuses are taxed as ordinary income at your regular tax bracket, not at a special bonus rate.
  • Your employer withholds either 22 percent (or 37 percent for very large bonuses) or calculates withholding based on your total pay for that period.
  • The amount withheld is an estimate; your actual tax bill is determined when you file your return and may result in a refund or amount owed.
  • State and local income taxes also explore to bonuses in most states, and your employer will withhold those separately.
  • Self-employed people and contractors do not have withholding taken out and must set aside money for taxes themselves.

How withholding works on bonuses

When you receive a bonus, your employer calculates federal income tax withholding using IRS rules. If they use the percentage method, they withhold 22 percent of the bonus amount for federal income tax. This is a flat rate that does not depend on your tax bracket or how much you earn the rest of the year.

If your total bonuses in a single year exceed $1 million, the percentage method requires your employer to withhold 37 percent on the amount over $1 million. This is a temporary rule that has been in place since 2018.

Your employer also withholds Social Security tax (6.2 percent) and Medicare tax (1.45 percent) from the bonus, just as they do from your regular pay. These amounts go toward your Social Security benefits and Medicare coverage.

If your employer uses the aggregate method instead, they combine your bonus with your regular paycheck for that pay period and calculate withholding as if it were all one payment. This can result in more or less withholding depending on your tax bracket and how the combined amount falls within the IRS withholding tables.

Why your withholding may not equal what you owe

The withholding your employer takes out is an estimate based on IRS rules, not a calculation of your actual tax liability. Your real tax bill depends on your total income for the entire year, your filing status, deductions, and credits — things your employer does not know when they process the bonus.

If you receive a large bonus in December and your income for the year is lower than usual, your employer may have withheld too much. In that case, you will receive a refund when you file your tax return. If you receive a bonus early in the year and earn significant additional income later, your employer may have withheld too little, and you will owe more tax at filing time.

The percentage method (22 percent withholding) often results in under-withholding for people in higher tax brackets. If you are in the 32 percent, 35 percent, or 37 percent federal bracket, the flat 22 percent rate will not cover your actual tax liability on the bonus. You should expect to owe additional tax when you file.

State and local taxes on bonuses

Most states that have an income tax will also tax your bonus. Your employer will withhold state income tax from the bonus at the rate set by your state. Some states have a flat tax rate; others use a progressive system with multiple brackets.

If you live in a state with no income tax — Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, or Wyoming — you will not owe state income tax on your bonus. However, if you work in a state different from where you live, you may owe tax to the state where you work, depending on that state's rules.

Local income taxes exist in some cities and counties, particularly in Ohio, Pennsylvania, Kentucky, and Indiana. Your employer will withhold local tax if you live or work in a jurisdiction that has one. The rate varies by location.

Bonuses for self-employed people and contractors

If you are self-employed or work as a contractor, no one withholds taxes from your bonus or any other income. You are responsible for setting aside money to pay federal income tax, self-employment tax (Social Security and Medicare), and state and local taxes yourself.

Self-employed people typically make estimated tax payments four times a year (quarterly) to the IRS. If you receive a large bonus, you should increase your next estimated payment to account for the additional income, or you may face a penalty for under-payment.

At the end of the year, you will report all your income on Schedule C (if you are a sole proprietor) or on your business tax return, and calculate what you actually owe. If you have not set aside enough, you will owe the difference when you file.

How bonuses affect your tax bracket

A bonus pushes your total income higher for the year, which can move you into a higher tax bracket. However, only the income in that higher bracket is taxed at the higher rate — your existing income is still taxed at the lower rates you already paid.

For example, if you are single and earn $50,000 in salary, you are in the 22 percent federal bracket for 2024. If you receive a $20,000 bonus, your total income is $70,000. The first $50,000 is still taxed at 22 percent, but the additional $20,000 may be taxed at 24 percent (the next bracket). You do not pay 24 percent on all $70,000.

A bonus can also affect your may be able to access for certain tax credits or deductions that phase out at higher income levels, such as the Earned Income Tax Credit or education credits. If a bonus pushes your income above the threshold, you may lose part or all of that benefit.

What to do if too much or too little was withheld

If you believe your employer withheld too much or too little tax on your bonus, you can adjust your withholding for future paychecks by filing a new Form W-4 with your employer. This form tells your employer how much to withhold from each paycheck.

You cannot change what was already withheld from a bonus that has been paid. Instead, you will settle the difference when you file your tax return. If too much was withheld, you will receive a refund. If too little was withheld, you will owe the additional amount.

If you receive bonuses regularly and want to avoid a large bill or refund at tax time, you can ask your employer to withhold extra money from your regular paychecks or from the bonus itself. Some employers will do this if you request it in writing.

Frequently Asked Questions

Is a bonus taxed differently than regular salary?

No. A bonus is taxed as ordinary income at your regular tax bracket. The only difference is that your employer may withhold a flat 22 percent for federal income tax instead of calculating withholding based on your full year's income. The actual tax you owe is determined when you file your return.

Can I avoid taxes on a bonus?

No. Bonuses are income and are subject to federal, state, and local income taxes, as well as Social Security and Medicare taxes. There is no legal way to avoid paying tax on a bonus, though you can plan ahead to reduce the impact on your tax bill.

What if my employer withheld 22 percent but I owe more?

If you are in a higher tax bracket, 22 percent withholding will not cover your actual tax liability. You will owe the difference when you file your return. You can adjust your W-4 for future paychecks to have more withheld from your regular salary, or request that your employer withhold extra from your next bonus.

Do I have to report my bonus on my tax return?

Yes. Your employer will report the bonus on your Form W-2, and you must include it in your income when you file. The IRS receives a copy of your W-2, so they will know about the bonus whether or not you report it.

How does a bonus affect my refund or amount owed?

A bonus increases your total income for the year, which may increase the tax you owe or reduce a refund you would have received. The final amount depends on your total income, deductions, credits, and how much was withheld from all your paychecks and the bonus combined.