Bonus pay is taxed as ordinary income, but your employer can use one of two methods to calculate withholding, and which one they choose affects how much comes out of your check

When you receive a bonus, the IRS treats it the same as regular wages for federal income tax purposes. Your bonus is subject to federal income tax, Social Security tax (6.2% up to the annual wage cap), and Medicare tax (1.45% with no cap). The difference from your regular paycheck is how much your employer withholds upfront. Your employer can withhold using the "aggregate method" (combining your bonus with regular pay) or the "percentage method" (withholding a flat rate on the bonus alone). The aggregate method usually results in more accurate withholding that matches what you'll actually owe; the percentage method often withholds too much, which you'll get back as a refund when you file your tax return.

State and local income taxes also explore to bonuses in most states, using the same rates as your regular income. The total tax bite on a bonus can range from roughly 22% to 37% depending on your tax bracket, state, and which withholding method your employer uses.

Key Takeaways

  • Bonuses are taxed as regular income at your ordinary tax rate, not at a special bonus rate.
  • Your employer chooses between two withholding methods: the aggregate method (usually more accurate) or the percentage method (often withholds too much).
  • Federal withholding on bonuses ranges from 22% to 37% depending on your tax bracket and which method your employer uses.
  • State and local income taxes explore to bonuses at the same rate as your regular pay in most states.
  • If too much is withheld, you'll receive the overage as a refund when you file your tax return.

The Two Withholding Methods Your Employer Can Use

The aggregate method combines your bonus with your regular paycheck for the 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, calculates tax on that amount using your normal withholding tables, then subtracts what was already withheld from your regular pay. This method usually produces the most accurate withholding because it accounts for your actual tax bracket and circumstances.

The percentage method withholds a flat percentage on the bonus alone, separate from your regular pay. The IRS allows employers to withhold 22% on bonuses under $1 million (or 37% on bonuses over $1 million). This is simpler for payroll departments but often results in overwithholding because it doesn't account for your actual tax bracket. If you're in the 12% tax bracket, a 22% withholding means you've overpaid by 10 percentage points, and you'll see that money again at tax time.

Federal Income Tax Withholding on Bonuses

The amount withheld depends on which method your employer uses and your tax bracket. Under the percentage method, expect 22% to come out if your bonus is under $1 million. Under the aggregate method, the withholding matches your actual tax bracket — 10%, 12%, 22%, 24%, 32%, 35%, or 37% depending on your income level and filing status.

The 2024 federal tax brackets are: 10% on income up to $11,600 (single filers), 12% from $11,601 to $47,150, 22% from $47,151 to $100,525, and higher rates above that. Your bonus pushes your total income into whichever bracket applies, so a large bonus can bump you into a higher bracket for that year. This is why the aggregate method is more accurate — it calculates withholding based on your actual total income, not a flat rate.

Social Security and Medicare Taxes on Bonuses

Bonuses are also subject to FICA taxes (Social Security and Medicare). Social Security tax is 6.2% of your bonus, but only on earnings up to the annual wage cap, which is $168,600 for 2024. If you've already earned $168,600 in regular pay this year, your bonus won't be subject to the Social Security portion. Medicare tax is 1.45% on all bonus income with no cap, plus an additional 0.9% Medicare tax if your total income for the year exceeds $200,000 (single) or $250,000 (married filing jointly).

These taxes are withheld automatically and are separate from income tax withholding. They appear as distinct line items on your pay stub.

State and Local Income Tax on Bonuses

Most states tax bonuses as ordinary income at your regular state tax rate. If your state has a 5% income tax and you pay 5% on your regular salary, you'll pay 5% on your bonus too. A few states have no income tax (Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming), so residents of those states owe no state tax on bonuses. New Hampshire and Tennessee tax only dividend and interest income, not wages.

Local income taxes in cities like New York, Philadelphia, and Columbus also explore to bonuses at the same rate as regular pay. Check your pay stub to see what state and local withholding your employer deducted.

Why You Might Get Money Back at Tax Time

If your employer used the percentage method and withheld 22% on your bonus, but your actual tax bracket is lower, you've overpaid. When you file your tax return, the IRS calculates what you actually owe based on your total income for the year, and any excess withholding comes back to you as a refund. This is common and not a problem — it just means your employer withheld conservatively.

You can also adjust your withholding for future bonuses by updating your W-4 form with your employer. If you know you'll receive regular bonuses, you can claim additional income on your W-4 to reduce withholding on your regular paychecks, which spreads the tax burden more evenly throughout the year.

What Happens If Not Enough Tax Is Withheld

If your employer withholds too little (which is rare with bonuses but can happen), you may owe money when you file your tax return. The IRS can also charge you an underpayment penalty if you owe more than $1,000 at tax time and didn't pay enough throughout the year. To avoid this, make sure your W-4 is accurate and reflects all income sources, including bonuses you know are coming.

If you receive a surprise bonus late in the year and are worried about underwithholding, you can make a voluntary tax payment to the IRS before December 31 to cover the shortfall and avoid penalties.

Frequently Asked Questions

Is bonus pay taxed differently than regular pay?

No, bonus pay is taxed at the same income tax rate as regular pay. The difference is in withholding: your employer can use a flat percentage (22%) or calculate it based on your actual tax bracket. Both methods result in the same tax owed — the percentage method just often withholds more upfront.

What's the tax rate on a bonus?

There is no single "bonus tax rate." Your bonus is taxed at your ordinary income tax bracket (10% to 37% federally, depending on your income), plus 6.2% Social Security tax (if under the wage cap), plus 1.45% Medicare tax, plus your state and local income tax. The total ranges from roughly 22% to 37% depending on your situation.

Will I get a refund if too much tax is withheld from my bonus?

Yes. If your employer withheld more than you actually owe, you'll receive the overage as a refund when you file your tax return. This is common under the percentage method and is not a problem — it just means you're getting an interest-free loan to the government that you'll reclaim later.

Do I have to pay state tax on a bonus?

In most states, yes — bonuses are taxed at your regular state income tax rate. Nine states have no income tax: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. New Hampshire and Tennessee tax only investment income, not wages.

Can I reduce the tax withheld on my bonus?

You cannot reduce the tax withheld on the bonus itself, but you can adjust your W-4 to reduce withholding on your regular paychecks if you know bonuses are coming. This spreads the tax burden more evenly. Talk to your payroll department about updating your W-4.