Your bonus is taxed as ordinary income, but your employer may withhold at a flat rate instead of calculating based on your actual tax bracket

When you receive a bonus, the IRS treats it as regular wages. That means it is subject to federal income tax, Social Security tax (6.2%), and Medicare tax (1.45%), just like your regular paycheck. However, the amount withheld from your bonus does not always match what you will actually owe when you file your tax return. Your employer chooses one of two withholding methods, and that choice affects how much money you see.

The difference matters because a bonus can push you into a higher tax bracket for the year, or it can be withheld at a rate that does not match your bracket at all. Understanding which method your employer uses helps you know whether you will owe money in April or receive a refund.

Key Takeaways

  • Your employer withholds federal income tax from your bonus using either the aggregate method (combined with regular pay) or the percentage method (a flat 22% or 37% rate).
  • The percentage method often withholds more than you actually owe, especially if your bonus is large relative to your annual income.
  • A bonus can push your total income into a higher tax bracket, meaning you may owe more tax on the bonus than on regular wages at the same amount.
  • You can adjust your W-4 after receiving a bonus to reduce withholding on future paychecks, or request additional withholding if you expect to owe.
  • Social Security and Medicare taxes (7.65% combined) are always withheld from bonuses at the same rate as regular wages.

The two withholding methods employers use

The aggregate method treats your bonus as part of your regular paycheck for that pay period. Your employer adds the bonus to your regular wages, calculates withholding on the total, and subtracts what was already withheld from earlier paychecks. This method is more accurate because it accounts for your actual tax bracket. If you earn $60,000 a year and receive a $5,000 bonus, the aggregate method withholds based on your combined income of $65,000, which is closer to what you will actually owe.

The percentage method withholds a flat rate from the bonus alone, separate from your regular pay. The IRS allows employers to withhold 22% on bonuses up to $1 million in a calendar year, and 37% on anything above that. This method is simpler for payroll but often withholds too much. A $5,000 bonus would have $1,100 withheld (22%), even if your actual tax bracket is 12%.

Ask your payroll department which method they use. Some employers let you choose, though most do not. If your employer uses the percentage method and you expect a large refund, you can adjust your W-4 to reduce withholding on future paychecks.

How bonuses affect your tax bracket

Federal income tax is progressive, meaning higher income is taxed at higher rates. A bonus can push you into a higher bracket, so the tax on the bonus itself may be higher than the tax on the same amount of regular wages. For example, if you earn $50,000 and are in the 12% bracket, a $10,000 bonus does not straightforward add $1,200 in tax. Instead, part of the bonus may be taxed at 12% and part at 22%, depending on where the bracket boundary falls.

The aggregate method accounts for this automatically. The percentage method does not—it withholds 22% regardless of your bracket. If your actual bracket is 12%, you will have overpaid and should see a refund. If your bracket is 24%, you will have underpaid and may owe money in April.

This is why bonuses sometimes feel like they are taxed more heavily than regular pay. The withholding may be correct, or it may not match your situation—you will know for certain when you file your return.

State and local taxes on bonuses

In addition to federal withholding, your state and local government may tax your bonus. Most states treat bonuses as ordinary income and withhold at your regular state income tax rate. Some states have no income tax at all (Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming), so residents of those states pay no state tax on bonuses.

A few states allow employers to withhold a flat rate on bonuses, similar to the federal percentage method. New York, for example, permits a flat 6.85% withholding on bonuses. Check your state's tax department website or ask your payroll department what rate applies to you. If you work in one state and live in another, you may owe tax to both.

What happens if too much or too little is withheld

If your employer withholds more than you owe, you will receive a refund when you file your tax return. This is common with the percentage method, especially on large bonuses. The refund comes back to you, but you do not earn interest on it—the IRS straightforward returns your overpayment.

If too little is withheld, you will owe money in April. This can happen if your bonus pushes you into a higher bracket than your regular withholding accounts for, or if you have other income your employer does not know about. You can avoid this by adjusting your W-4 after receiving a bonus. Form W-4 lets you request additional withholding on your regular paychecks, which gives you time to set aside the money before tax day.

If you receive bonuses regularly, consider updating your W-4 once a year to account for the total bonus income you expect. This spreads the tax burden across the year instead of creating a surprise bill in April.

Self-employment and contractor bonuses

If you are self-employed or receive a bonus as a contractor (not as a W-2 employee), no tax is withheld automatically. You are responsible for setting aside money for federal, state, and self-employment taxes. Self-employment tax is 15.3% (12.4% Social Security plus 2.9% Medicare), plus your federal income tax based on your bracket. You may also owe quarterly estimated taxes.

Contractors should set aside roughly 25% to 30% of bonus income for taxes, depending on their bracket and state. Consult a tax professional if you are unsure, because underpayment can result in penalties and interest.

How to plan for bonus taxes

If you know a bonus is coming, you can estimate your tax liability before you receive it. Add the bonus amount to your expected annual income, find your tax bracket, and calculate what you will owe. Subtract what your employer will withhold, and you will know whether to expect a refund or a bill.

If you want to reduce the amount withheld from your bonus, you can submit a new W-4 before the bonus is paid. Form W-4 lets you claim additional dependents or request a specific dollar amount of withholding. Keep in mind that reducing withholding on your bonus means less money withheld from your regular paychecks, so plan accordingly.

Alternatively, if you expect to owe money, you can request that your employer withhold extra from the bonus itself. Most payroll departments will honor a written request to increase withholding on a specific check.

Frequently Asked Questions

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

Not necessarily. Your bonus is taxed at your marginal tax bracket, the same as regular wages. However, if the bonus pushes your total income higher, part of it may be taxed at a higher rate. The withholding method your employer uses also matters—the percentage method (22%) may withhold more or less than your actual bracket.

Can I avoid taxes on a bonus?

No. Bonuses are taxable income. However, you can reduce your withholding by adjusting your W-4, which means less tax is taken from your paycheck now and you may owe at tax time instead. This does not reduce the tax you owe—it just changes when you pay it.

What if my employer withheld 22% but my tax bracket is only 12%?

You will have overpaid, and you should receive a refund when you file your tax return. The refund reflects the difference between what was withheld and what you actually owe based on your total annual income and tax bracket.

Do I have to pay Social Security and Medicare taxes on a bonus?

Yes. Social Security tax (6.2%) and Medicare tax (1.45%) are withheld from bonuses at the same rate as regular wages. These are separate from federal income tax and are not affected by your tax bracket.

How do I know if my employer uses the aggregate or percentage method?

Contact your payroll or human resources department and ask directly. They can tell you which method they use and what withholding rate applies to your bonus. If you want to know your estimated tax liability before the bonus is paid, provide them with the bonus amount and they can calculate the withholding.