Bonuses are taxed as ordinary income, but your employer can withhold using one of two methods

When you receive a bonus, your employer must withhold federal income tax, Social Security tax (6.2%), and Medicare tax (1.45%). The amount withheld depends on which method your employer uses. Most employers use the aggregate method, which treats your bonus as part of your regular paycheck and withholds based on your total income for that pay period. Some employers use the percentage method, which withholds a flat 22% (or 37% if the bonus exceeds $1 million) regardless of your actual tax bracket.

The key difference: the aggregate method usually gets your withholding closer to what you actually owe, while the percentage method often withholds too much or too little. Either way, you settle the real amount owed when you file your tax return. If too much was withheld, you get a refund. If too little, you owe the difference.

Key Takeaways

  • Your employer withholds federal income tax, Social Security tax, and Medicare tax from bonuses using either the aggregate method (treats bonus as part of regular pay) or the percentage method (flat 22% or 37%).
  • The aggregate method usually results in more accurate withholding because it accounts for your actual tax bracket and other income.
  • State and local income taxes may also be withheld from your bonus, depending on where you live and work.
  • The amount withheld is not your final tax bill — you reconcile the actual amount owed when you file your return in April.

The aggregate method: bonus added to your regular paycheck

Under the aggregate method, your employer adds the bonus to your regular paycheck for that pay period and calculates withholding on the total. If you normally earn $2,000 per paycheck and receive a $5,000 bonus, your employer treats it as a $7,000 paycheck and withholds based on that amount.

This method is more accurate because it uses your actual tax bracket. If you are in the 22% federal bracket, the withholding will reflect that. The downside is that a large bonus can push you into a higher bracket temporarily, causing more withholding than you might expect. However, this extra withholding is returned to you when you file your return and the IRS sees your actual annual income.

The percentage method: flat withholding rate

Under the percentage method, your employer withholds a flat 22% from the bonus, or 37% if the bonus exceeds $1 million. This rate applies regardless of your tax bracket or how much other income you earned that year.

The percentage method is simpler for employers to calculate but often results in incorrect withholding. If you are in the 12% bracket, 22% is too much. If you are in the 32% bracket, 22% is too little. The error gets corrected when you file your return, but you may owe money in April or receive a larger refund than expected.

State and local taxes on bonuses

In addition to federal withholding, your state and local government may tax your bonus. Most states with an income tax withhold on bonuses the same way the federal government does — either using the aggregate method or a flat percentage. The rate varies by state and by your income level.

If you live in a state with no income tax (such as Texas, Florida, or Wyoming), no state withholding occurs. If you work in a state different from where you live, your employer withholds based on where you work, not where you live. You may owe taxes to both states, or you may be able to claim a credit on your home state return.

What happens if too much or too little is withheld

Withholding is an estimate. The actual tax you owe is determined by your total income, deductions, and credits for the entire year. When you file your tax return in April, the IRS compares what was withheld to what you actually owe.

If your employer withheld more than you owe, you receive a refund. If your employer withheld less, you owe the difference. Neither outcome is a penalty — it is straightforward how the system reconciles. To reduce the chance of a large surprise in April, you can adjust your W-4 form after receiving a bonus, though this affects your regular paychecks going forward.

Bonuses and your overall tax picture

A bonus affects your tax situation in ways beyond just the withholding amount. If you are close to an income threshold for a tax credit (such as the Earned Income Tax Credit or child tax credit), a bonus might reduce or eliminate that credit. If you are self-employed or have investment income, a bonus adds to your total income and may affect how much you owe in self-employment tax or estimated taxes.

The withholding your employer takes is not the final answer. It is a prepayment toward your actual tax liability. Your return shows the real picture once all your income, deductions, and credits are accounted for.

Frequently Asked Questions

Why does my bonus withholding look different from my regular paycheck?

Bonuses are often larger than a single paycheck, which can push you into a higher tax bracket temporarily under the aggregate method. Additionally, some employers use the percentage method for bonuses (flat 22%) while using the aggregate method for regular pay. The difference is resolved when you file your return.

Can I avoid withholding on my bonus?

No. Federal law requires your employer to withhold income tax, Social Security tax, and Medicare tax from all compensation, including bonuses. You cannot opt out of withholding, though you can adjust your W-4 to change how much is withheld from future paychecks.

What if I get a bonus in December — does it affect my taxes for that year?

Yes. A bonus received in December is income for that tax year, even if you do not spend it until January. The withholding counts toward your 2024 tax liability (or whatever year you received it), and you report the bonus on your return for that year.

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

Your employer reports it on your W-2 form, which you receive in January. The bonus is already included in your W-2 wages, so you do not enter it separately — you just report the W-2 total. The withholding your employer took also appears on the W-2.

Can I get a refund of the withholding if I think too much was taken?

You cannot get a refund before filing your return, but if the withholding exceeds what you actually owe, you will receive a refund when you file in April. If you want to reduce withholding on future bonuses, you can submit a new W-4 to your employer.