Bonuses are taxed as ordinary income, but your employer can withhold using one of two methods that often result in different amounts

When you receive a bonus, federal income tax, Social Security tax, and Medicare tax all come out of it—just like regular pay. The difference is how much gets withheld. Your employer can use the percentage method (withholding a flat percentage, usually 22% for federal income tax on bonuses under $1 million) or the aggregate method (adding the bonus to your regular paycheck and calculating withholding as if it were all one payment). The aggregate method often results in more tax withheld because it can push you into a higher tax bracket temporarily.

The amount withheld is not the same as the amount you actually owe. When you file your tax return, the IRS compares what was withheld to what you actually owe based on your full year's income. If too much was withheld, you get a refund. If too little was withheld, you owe more at tax time. This is why two people earning the same bonus can see very different amounts hit their bank account.

Key Takeaways

  • Your employer withholds federal income tax, Social Security tax (6.2%), and Medicare tax (1.45%) from bonuses, but the federal income tax withholding method varies by employer.
  • The percentage method withholds a flat 22% federal income tax on most bonuses, while the aggregate method can withhold more by treating the bonus as part of your regular paycheck.
  • What is withheld from your bonus is not what you owe in taxes—the actual amount owed depends on your total income for the year and your tax bracket.
  • If you receive a large bonus, you may want to adjust your W-4 to avoid a big tax bill or refund when you file your return.

The two withholding methods and why they matter

The percentage method is simpler and more common for bonuses. Your employer withholds a flat 22% in federal income tax (or 37% if the bonus is over $1 million). On top of that, Social Security tax of 6.2% and Medicare tax of 1.45% come out. So a $5,000 bonus might have roughly $1,100 to $1,200 withheld in federal income tax alone, plus the payroll taxes.

The aggregate method treats your bonus as if it were part of your regular paycheck. Your employer adds it to your next paycheck, calculates withholding on the combined amount, then subtracts what was already withheld from your regular pay. This method can result in significantly more federal income tax withheld because the larger combined paycheck may push you into a higher tax bracket. For example, if you earn $4,000 biweekly and receive a $10,000 bonus, the aggregate method calculates withholding on $14,000 instead of $4,000, which can mean an extra $1,000 or more in federal withholding.

You cannot choose which method your employer uses—that is up to them. However, you can ask your payroll department which method they explore, and you can adjust your W-4 form if you want to change how much is withheld overall.

Social Security and Medicare taxes on bonuses

Social Security tax and Medicare tax are withheld from bonuses at the same rate as regular pay: 6.2% for Social Security and 1.45% for Medicare. These are payroll taxes, and they come out regardless of which federal income tax withholding method your employer uses.

Social Security tax only applies to income up to a certain limit each year. In 2024, that limit is $168,600. Once you have earned that much in a calendar year, no more Social Security tax is withheld from any further bonuses or paychecks that year. Medicare tax has no limit and continues to be withheld on all income. If you earn over $200,000 as a single filer (or $250,000 if married filing jointly), an additional 0.9% Medicare tax is withheld on the amount above that threshold.

These payroll taxes are separate from federal income tax and are not refundable. Even if you end up with a large tax refund at the end of the year, the Social Security and Medicare taxes you paid on your bonus stay with the government.

State and local taxes on bonuses

Most states that have an income tax will withhold state income tax from your bonus at the same rate as your regular pay. The amount varies widely by state—from 0% in states with no income tax (like Texas, Florida, and Wyoming) to over 10% in states like California and New York. Your employer should withhold based on the state where you work, not where you live, unless your state has a special agreement with your employer's state.

Some cities also impose local income tax. If you live or work in a city with local income tax (such as New York City, Philadelphia, or Columbus, Ohio), your employer will withhold that as well. Local tax rates are typically between 1% and 3.5%.

If you work in one state but live in another, you may owe tax to both states. This is rare and usually only happens if you work across state lines. When you file your state tax return, you can claim a credit for taxes paid to another state to avoid double taxation, but you will need to file in both states first.

Why the amount withheld does not equal what you owe

Withholding is an estimate. Your employer does not know your full financial picture—whether you have other income, dependents, deductions, or tax credits. The withholding tables are designed to work for an average person, but your situation may be different.

If you receive a large bonus, the withholding may be too high or too low depending on your total income for the year. For example, if you earn $50,000 in regular pay and receive a $20,000 bonus, your total income is $70,000. If the aggregate method withholds as if you earned much more per paycheck, you might have too much withheld and receive a refund. Conversely, if you have other income from a side job or investments, the withholding on your bonus alone might not be enough.

The only way to know what you actually owe is to file your tax return and calculate your total tax liability based on all your income, deductions, and credits for the year. That is when the IRS compares what was withheld to what you owe and either sends you a refund or bills you for the difference.

Adjusting your withholding if you receive a large bonus

If you know you will receive a significant bonus, you can adjust your W-4 form to change how much is withheld from your regular paychecks. This helps you avoid a large refund or a big tax bill later.

To adjust your withholding, fill out a new W-4 form and give it to your payroll department. The form asks about your income, dependents, and other jobs. You can use the IRS withholding calculator on irs.gov to estimate how much should be withheld based on your expected total income for the year, including the bonus. If the calculator shows you will have too much withheld, you can claim additional allowances or a flat dollar amount to reduce withholding. If it shows too little, you can reduce allowances or request extra withholding.

Keep in mind that adjusting your W-4 affects all your paychecks going forward, not just the one with the bonus. If you only want to adjust withholding for the bonus itself, you can ask your payroll department if they offer a one-time adjustment or if you can request extra withholding just on that check.

Bonuses and tax brackets

Your bonus can push you into a higher tax bracket, which affects how much federal income tax is withheld. Tax brackets are progressive, meaning different portions of your income are taxed at different rates. In 2024, for a single filer, income up to about $11,600 is taxed at 10%, income from $11,600 to $47,150 is taxed at 12%, and so on.

If your regular income puts you near the top of a bracket and you receive a bonus, that bonus may be taxed at a higher rate. This is especially true if your employer uses the aggregate method, which can make the effect more dramatic. However, this is not a permanent change to your tax bracket—it only applies to the income you earn in that year. Next year, your bracket resets based on your income for that year.

This is why some people see a larger percentage of their bonus withheld than they expected. It is not unfair; it is how the tax system works. When you file your return and report all your income, the IRS will recalculate your total tax and refund any overpayment.

Frequently Asked Questions

Is my bonus taxed differently than my regular paycheck?

The taxes that come out are the same types—federal income tax, Social Security, Medicare, and state/local taxes. The difference is that federal income tax withholding on bonuses often uses a flat percentage (22%) rather than the withholding tables used for regular pay, which can result in a different amount withheld.

Can I avoid taxes on my bonus?

No. Bonuses are taxable income and cannot be avoided. However, you can adjust your W-4 to manage how much is withheld throughout the year so you do not owe a large amount at tax time or receive a large refund.

What if my employer withheld too much tax from my bonus?

When you file your tax return, the IRS will compare what was withheld to what you actually owe. If too much was withheld, you will receive a refund. This typically happens a few weeks after you file.

Do I have to pay taxes on a signing bonus or performance bonus?

Yes. All bonuses—signing bonuses, performance bonuses, holiday bonuses, and referral bonuses—are taxable income. Your employer must withhold taxes from them just like regular pay.

How do I know if the aggregate or percentage method was used on my bonus?

Check your pay stub. If the federal income tax withheld seems unusually high, your employer may have used the aggregate method. You can also ask your payroll department directly which method they use for bonuses.