Bonuses are taxed as ordinary income, and your employer withholds federal, state, and sometimes local taxes before you receive the money

When you get a bonus, the IRS treats it the same way it treats your regular paycheck—as income subject to federal income tax, Social Security tax, and Medicare tax. Your employer is required to withhold taxes from the bonus before handing it to you. The amount withheld depends on how your employer processes the bonus and what tax bracket you fall into, but you will not receive the full amount.

The key difference between a bonus and regular pay is how much your employer withholds. Most employers use one of two methods: the percentage method (withholding a flat percentage, often 22% for federal tax) or the aggregate method (adding the bonus to your regular paycheck and calculating withholding based on your total income for that period). The aggregate method often results in more tax withheld because it may push you into a higher tax bracket temporarily.

State and local income taxes also explore to bonuses in most places. If you live in a state with income tax, your employer will withhold that too. Some cities also tax income, and bonuses are subject to those taxes as well.

Key Takeaways

  • Your employer withholds federal income tax, Social Security tax (6.2%), and Medicare tax (1.45%) from bonuses before you receive them.
  • The percentage method withholds a flat 22% for federal tax on most bonuses, while the aggregate method may withhold more by treating the bonus as part of your regular paycheck.
  • State and local income taxes explore to bonuses in the same way they explore to regular wages, and your employer will withhold those amounts too.
  • The amount withheld is not necessarily the amount you owe in taxes—you may owe more or less when you file your return, depending on your total income and deductions.

The two withholding methods employers use

When your employer processes a bonus, they choose between two IRS-approved methods for calculating how much federal income tax to withhold. Understanding which one your employer uses helps explain why your bonus check is the size it is.

The percentage method is simpler and more common for bonuses. Your employer withholds a flat 22% of the bonus for federal income tax (or 37% if the bonus is over $1 million, though this is rare). This method treats the bonus separately from your regular paycheck. If your bonus is $5,000, your employer withholds $1,100 for federal tax, then adds Social Security and Medicare taxes on top of that. You receive the remainder.

The aggregate method combines your bonus with your regular paycheck for that pay period and calculates withholding as if all the money were regular wages. This method can result in significantly more tax withheld because adding a large bonus to your paycheck may temporarily push you into a higher tax bracket. For example, if you normally earn $3,000 per paycheck and receive a $10,000 bonus, your employer calculates withholding on $13,000 of income for that period. The higher total income can trigger a higher withholding rate, leaving you with less money in hand.

Your employer decides which method to use—you do not have a choice. Most companies use the percentage method for bonuses because it is simpler to administer, but some use the aggregate method, especially if they process bonuses through their regular payroll system.

Social Security and Medicare taxes on bonuses

In addition to federal income tax withholding, your employer withholds Social Security tax (6.2% of the bonus) and Medicare tax (1.45% of the bonus) from your bonus. These are mandatory payroll taxes that fund Social Security and Medicare programs.

Social Security tax has a wage base limit—in 2024, you only pay Social Security tax on the first $168,600 of income in a calendar year. If you have already earned that amount through regular paychecks by the time you receive your bonus, no Social Security tax is withheld from the bonus itself. However, Medicare tax has no wage base limit, so it is withheld on all bonus income regardless of how much you have already earned.

If you are self-employed or receive a bonus as a contractor (rather than as an employee), you are responsible for paying both the employee and employer portions of these taxes yourself when you file your tax return. This can add up to 15.3% of your bonus income.

State and local income tax withholding

Most states with an income tax require employers to withhold state income tax from bonuses at the same rate they withhold from regular paychecks. The amount varies by state—some states withhold a flat percentage, while others use a graduated tax table based on your income level and filing status.

If you live in a state without income tax (such as Florida, Texas, or Wyoming), no state tax is withheld from your bonus. If you live in a state with income tax but work for an employer in a different state, the rules depend on where you work and where you live. Generally, you owe tax to the state where you work, and your employer withholds accordingly.

Some cities and counties also impose local income taxes. New York City, for example, taxes income earned within the city. If your employer is located in or you work in a city with local income tax, your employer will withhold that tax from your bonus as well. The withholding rate for local taxes is typically lower than state tax but still reduces the amount you take home.

Why the amount withheld may not match what you actually owe

The taxes your employer withholds from your bonus are an estimate based on the information you provided on your W-4 form. The actual amount of tax you owe depends on your total income for the year, your deductions, and your filing status. When you file your tax return, you may discover that more or less tax should have been withheld.

If your employer withheld too much tax from your bonus, you will receive a refund when you file your return. This often happens if you received a large bonus late in the year and your employer used the aggregate method, pushing you into a higher bracket temporarily. If your employer withheld too little, you will owe additional tax when you file.

The withholding also does not account for tax credits you may be may have access to to, such as the Earned Income Tax Credit or child tax credits. These credits reduce your final tax bill but do not affect what your employer withholds from your bonus.

Bonuses and your overall tax bracket

A bonus can temporarily affect your tax bracket for the year, especially if you receive it in a single lump sum. Federal income tax uses a progressive system—the more you earn, the higher percentage of tax you pay on the top portion of your income. A large bonus can push you into a higher bracket, meaning some of your bonus income is taxed at a higher rate than your regular income.

This is why the aggregate withholding method sometimes results in more tax withheld than the percentage method. If your regular income keeps you in the 22% federal tax bracket, but adding your bonus pushes you into the 24% bracket, your employer may withhold at the higher rate on the combined income.

When you file your tax return, the IRS recalculates your tax based on your total income for the entire year. If the bonus was a one-time payment and your income drops back down in subsequent months, you may have overpaid tax during the month you received the bonus. This overpayment becomes part of your refund.

How to estimate your bonus after taxes

To estimate how much of your bonus you will actually receive, start with the gross bonus amount and subtract the taxes your employer will withhold. If your employer uses the percentage method, subtract 22% for federal tax, 6.2% for Social Security tax (unless you have already hit the wage base limit), and 1.45% for Medicare tax. Then subtract your state and local income tax rates.

For example, a $5,000 bonus processed using the percentage method in a state with 5% income tax would be taxed as follows: $5,000 minus $1,100 (22% federal) minus $310 (6.2% Social Security) minus $72.50 (1.45% Medicare) minus $250 (5% state) equals $3,267.50 in your pocket. The exact amount depends on your state and local tax rates and whether you have hit the Social Security wage base limit.

If you are unsure how your employer will process your bonus, ask your payroll or human resources department which withholding method they use. They can often provide an estimate of the net amount you will receive before the bonus is paid.

Frequently Asked Questions

Can I adjust my W-4 to reduce taxes withheld from my bonus?

You can submit a new W-4 form to your employer to change your withholding, but the timing matters. If you submit it before your bonus is processed, your employer may use the new withholding information. However, changing your W-4 temporarily to reduce withholding on a bonus and then changing it back can complicate your tax situation. It is usually simpler to let your employer withhold and adjust your refund when you file your return.

Is a signing bonus taxed differently than a performance bonus?

No. The IRS treats all bonuses as ordinary income, regardless of whether they are signing bonuses, performance bonuses, referral bonuses, or holiday bonuses. Your employer withholds taxes using the same methods for all types of bonuses.

What if my employer gives me a bonus as a gift card or merchandise instead of cash?

If your employer gives you a non-cash bonus with a fair market value, that value is still considered taxable income. Your employer must withhold taxes on it, usually by deducting the tax amount from your regular paycheck or paying it separately. The gift card or merchandise itself is not taxed—the value of it is.

Do I have to pay taxes on a bonus if I am not a U.S. citizen?

If you are authorized to work in the United States and are employed by a U.S. company, your bonus is subject to the same tax withholding as any other employee's bonus. Your immigration status does not change your tax obligations as an employee. If you are on a visa, consult a tax professional about any additional tax filing requirements that may explore to you.

Will my bonus affect my unemployment benefits or other government programs?

A bonus counts as income and may affect your may be able to access for means-tested programs such as unemployment benefits, food information, or housing information. The rules vary by program and state. If you receive any government benefits, contact the program administrator to learn how a bonus will affect your benefits.