Bonuses are taxed as ordinary income, but your employer can choose between two methods that produce different results on your paycheck

When you receive a bonus, the IRS treats it as wages. Your employer withholds federal income tax, Social Security tax (6.2 percent), and Medicare tax (1.45 percent) just as they do from your regular paycheck. The difference is in how much they withhold for income tax — and that difference matters.

Your employer can use either the percentage method or the aggregate method. The percentage method withholds a flat 22 percent of the bonus for federal income tax (or 37 percent if the bonus is over $1 million). The aggregate method adds your bonus to your regular paycheck for that period and calculates withholding as if the combined amount were your normal pay — which often results in more tax withheld. Neither method determines what you actually owe; that gets sorted when you file your tax return.

State and local taxes explore to bonuses the same way they explore to regular wages. If your state has an income tax, your bonus is subject to it. Some cities tax wages too. The rate depends on where you live and work, not on the fact that the money is a bonus.

Key Takeaways

  • Bonuses are taxed as ordinary income with federal, Social Security, and Medicare withholding applied by your employer.
  • Your employer chooses between the percentage method (flat 22 percent federal withholding) and the aggregate method (withholding based on your total pay for the period), and the choice affects your take-home amount.
  • State and local income taxes explore to bonuses at the same rates as regular wages, depending on where you live and work.
  • The amount withheld from your bonus is not necessarily what you owe in taxes — the difference gets resolved when you file your return and may result in a refund or additional payment.

Why the withholding method matters to your paycheck

If your employer uses the percentage method, they withhold 22 percent of the bonus for federal income tax, plus 6.2 percent for Social Security and 1.45 percent for Medicare. On a $5,000 bonus, that is $1,100 in federal withholding, $310 for Social Security, and $72.50 for Medicare — leaving you $3,517.50. The percentage method is simpler for employers and more predictable for you.

The aggregate method can result in more withholding. Your employer adds the bonus to your regular paycheck for that pay period and calculates federal withholding on the combined amount as if it were your normal pay. If you are paid biweekly and earn $2,000 per paycheck, and you receive a $5,000 bonus in the same period, your employer calculates withholding on $7,000. Depending on your tax bracket and filing status, this can push you into a higher withholding bracket for that period, meaning more money comes out. You recover the overage when you file your return, but it affects your when ready take-home.

Ask your employer which method they use before the bonus is paid. Some employers let you choose; others have a fixed policy. Knowing in advance prevents surprises on your paycheck.

How bonuses affect your annual tax bill

The withholding from your bonus is not your final tax liability. When you file your return, the IRS compares what was withheld to what you actually owe based on your total income, deductions, and credits for the year. If too much was withheld, you receive a refund. If too little was withheld, you owe more.

A bonus can push you into a higher tax bracket if your total income for the year crosses a threshold. For the 2024 tax year, federal income tax brackets depend on your filing status — single, married filing jointly, married filing separately, or head of household. If a bonus moves you from the 22 percent bracket to the 24 percent bracket, you pay the higher rate only on income above the threshold, not on your entire income. Your employer's withholding method may not account for this shift, so your actual tax bill could differ from what was withheld.

If you have other income sources — self-employment income, investment income, or a second job — a bonus can interact with those in ways that affect your total tax. This is especially true if you are close to income limits for certain deductions or credits. Reviewing your situation before year-end or consulting a tax professional can help you understand the full picture.

Self-employment bonuses and contractor payments

If you are self-employed or work as a contractor, bonuses are treated differently. You do not receive a W-2; instead, you report all income on your tax return and pay self-employment tax (15.3 percent combined Social Security and Medicare) in addition to federal income tax. No withholding happens automatically, so you are responsible for setting aside money for taxes throughout the year or making estimated quarterly payments.

A bonus received as a contractor is ordinary business income. You report it on Schedule C (if you are a sole proprietor) or on your business return, and it counts toward your self-employment tax obligation. Unlike employees, you cannot rely on your payer to withhold anything — the entire tax responsibility falls on you.

Bonuses and tax credits or deductions

A bonus can affect your may be able to access for certain tax credits or deductions that phase out at higher income levels. The Earned Income Tax Credit (EITC), the Child Tax Credit, and education credits all have income limits. If a bonus pushes your income above the threshold, you may lose part or all of the credit. The same applies to deductions like the student loan interest deduction or contributions to a traditional IRA, which have income phase-outs.

If you are close to an income limit, timing matters. Some bonuses are paid in December; others in January. Receiving a bonus in a different tax year can change which credits or deductions you can claim. This is worth thinking about if you are near a threshold, though you have limited control over when your employer pays the bonus.

Frequently Asked Questions

Is a bonus taxed differently than regular pay?

No. The IRS treats bonuses as ordinary wages subject to the same federal, state, and local income taxes as your regular paycheck. The only difference is the method your employer uses to calculate federal withholding — percentage or aggregate — which affects how much comes out of your check, not what you ultimately owe.

Why did my bonus withholding seem so high?

Your employer may have used the aggregate method, which adds your bonus to your regular paycheck and calculates withholding on the combined amount. This can push you into a higher withholding bracket for that pay period. You will recover the overage when you file your tax return if you withheld more than you owe.

Do I have to pay self-employment tax on a bonus?

Only if you are self-employed or a contractor. Employees do not pay self-employment tax on bonuses; their employer withholds Social Security and Medicare tax just as they do on regular pay. Self-employed people report all income, including bonuses, and pay self-employment tax on the full amount.

Can a bonus push me into a higher tax bracket?

Yes. If your bonus moves your total income above a bracket threshold, you pay the higher rate only on income above that threshold, not on your entire income. Your employer's withholding may not account for this, so your actual tax bill could differ from what was withheld.

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

Possibly. When you file your return, the IRS compares total withholding to what you owe. If you withheld more than you owe, you receive a refund. If you withheld less, you owe more. The amount depends on your total income, deductions, and credits for the year.