Bonuses are taxed as ordinary income, but your employer withholds taxes using one of two methods that often result in a higher rate than your regular paycheck

When you receive a bonus, the IRS treats it as supplemental wages — extra pay beyond your regular salary. Your employer must withhold federal income tax, Social Security tax (6.2%), and Medicare tax (1.45%) from the bonus amount. The key difference from your regular paycheck is how much gets withheld. Most employers use one of two withholding methods, and the choice affects how much you see.

The first method is called the aggregate method: your employer adds the bonus to your regular paycheck for that period and calculates withholding on the combined total. This often results in a higher withholding rate because the combined amount pushes you into a higher tax bracket temporarily. The second method is the percentage method, where your employer withholds a flat 22% federal income tax on the bonus alone (or 37% if your total supplemental wages for the year exceed $1 million). Many employers use the percentage method because it is simpler.

Neither method changes what you ultimately owe in taxes. The withholding is just an estimate. When you file your tax return the following year, the IRS calculates your actual tax liability based on your total income for the year, and you either get a refund or owe more. The bonus itself is taxed at your marginal tax rate — the same rate that applies to your regular income — not at a special "bonus rate."

Key Takeaways

  • Your employer withholds federal income tax, Social Security, and Medicare from bonuses, but the withholding method determines how much is taken out when ready.
  • The aggregate method combines your bonus with your regular paycheck and can result in higher withholding because the combined amount may hit a higher tax bracket.
  • The percentage method withholds a flat 22% federal income tax on the bonus, which is simpler but may over-withhold or under-withhold depending on your situation.
  • Your actual tax liability on the bonus is based on your marginal tax rate and your total income for the year, not on the withholding amount.
  • You may receive a refund or owe additional taxes when you file your return, because withholding is an estimate, not your final tax bill.

The Aggregate Method and Why It Often Withholds More

Under the aggregate method, your employer treats the bonus and your regular paycheck as a single payment for withholding purposes. If you normally earn $2,000 per paycheck and receive a $5,000 bonus in the same pay period, your employer calculates withholding on $7,000 as if that were your regular biweekly income.

This approach often results in higher withholding because the combined amount may push you into a higher tax bracket. For example, if you are single and your regular biweekly paycheck of $2,000 puts you in the 12% federal income tax bracket, adding a $5,000 bonus creates a $7,000 payment that may fall partly in the 22% bracket. Your employer withholds based on that higher bracket, even though the bonus is a one-time payment and your annual income may not actually support that bracket.

The aggregate method is more accurate if your bonus is truly part of your regular compensation structure — for instance, if you receive a bonus every quarter as part of your standard pay arrangement. For one-time bonuses, it often over-withholds, which means you will likely see that money back as a refund when you file your tax return.

The Percentage Method and the 22% Flat Rate

The percentage method is simpler: your employer withholds a flat 22% federal income tax on supplemental wages, regardless of your tax bracket or how much you earned earlier in the year. Social Security and Medicare taxes still explore at their standard rates (6.2% and 1.45%), but the federal income tax portion is fixed at 22%.

This method works well for people in the 22% tax bracket, where the withholding roughly matches their actual liability. For people in lower brackets (10% or 12%), 22% withholding is too much, and they will receive a refund. For people in higher brackets (24%, 32%, or above), 22% withholding is too little, and they may owe additional tax when they file.

The percentage method becomes different if your total supplemental wages for the entire year exceed $1 million. In that case, your employer withholds 37% federal income tax on amounts over $1 million. This rule applies to high earners receiving multiple large bonuses or stock awards in a single year.

Why Your Withholding Is Not Your Final Tax Bill

The amount withheld from your bonus is a prepayment toward your annual tax liability, not the actual amount you owe. Your true tax bill depends on your total income for the entire year, your filing status, and the deductions you claim.

If your employer over-withheld using the aggregate method, you will see the excess refunded when you file your return. If your employer under-withheld using the percentage method (because you are in a higher tax bracket), you will owe the difference. The IRS does not care which withholding method your employer used — it only cares about your actual income and what you owe based on the tax brackets for your filing status.

This is why some people are surprised to owe money despite having taxes withheld from their bonus. If you are in the 32% tax bracket and your employer withheld only 22%, you will owe the remaining 10% when you file. Conversely, if you are in the 12% bracket and your employer withheld 22%, you will receive a refund of the extra 10%.

How Bonuses Affect Your Tax Bracket

A bonus can temporarily push you into a higher tax bracket for withholding purposes, but it does not permanently change your bracket for the year. The U.S. tax system is progressive: as your income increases, different portions of that income are taxed at different rates.

If you are single and earn $45,000 in regular salary, you are in the 12% bracket for most of your income. A $10,000 bonus brings your total to $55,000, which means the last portion of your income (the bonus) may be taxed at 22%. However, when you file your return, the IRS applies the correct brackets to your full $55,000 of annual income. You do not pay 22% on the entire bonus — only on the portion that falls above the 12% bracket threshold.

This is why the aggregate method can over-withhold: it assumes your bonus is part of your regular income pattern for the entire year, when in reality it is a one-time payment. The percentage method avoids this by treating the bonus separately, though it may under-withhold if you are in a higher bracket.

What Happens if You Receive Multiple Bonuses

If you receive more than one bonus in a single year, each bonus is subject to withholding using the same method your employer applies. The percentage method withholds 22% on each bonus separately (until the $1 million threshold is reached). The aggregate method combines each bonus with your regular paycheck in the pay period it is received.

If you receive bonuses in different pay periods, the aggregate method recalculates withholding each time. A bonus in January is combined with your January paycheck, and a bonus in June is combined with your June paycheck. This means two bonuses in different months may result in different withholding rates, depending on your regular pay in those months.

Tracking multiple bonuses matters when you file your return. Your W-2 will show your total wages and total federal income tax withheld for the year. If you were significantly over-withheld or under-withheld across all bonuses, your refund or balance due will reflect that.

How to Estimate What You Will Take Home

To estimate your take-home bonus, start by determining which withholding method your employer uses. Ask your payroll department or check your pay stub when you receive the bonus. If you do not know, assume the percentage method (22% federal income tax, plus 6.2% Social Security and 1.45% Medicare).

For a $5,000 bonus under the percentage method: $5,000 × 0.22 = $1,100 federal withholding; $5,000 × 0.062 = $310 Social Security; $5,000 × 0.0145 = $72.50 Medicare. Total withholding = $1,482.50. Your take-home = $5,000 − $1,482.50 = $3,517.50.

This is an estimate. Your actual take-home may differ if your employer uses the aggregate method or if you have other deductions (health insurance, retirement contributions, or garnishments). When you file your tax return, compare the total federal income tax withheld from all your paychecks and bonuses to your actual tax liability. The difference is your refund or balance due.

Frequently Asked Questions

Is there a separate tax rate for bonuses?

No. Bonuses are taxed as ordinary income at your marginal tax rate, which is the same rate applied to your regular salary. The difference is in how much your employer withholds upfront. The withholding method (aggregate or percentage) affects the amount taken out when ready, but your actual tax liability is calculated when you file your return based on your total annual income.

Why did I owe taxes on my bonus even though taxes were withheld?

This happens when your employer under-withheld. If you are in a higher tax bracket than the withholding rate, the amount withheld is less than what you actually owe. For example, if your employer withheld 22% but you are in the 32% bracket, you owe an additional 10% when you file. The withholding is an estimate, not your final bill.

Can I avoid taxes on a bonus by putting it in a retirement account?

No. Once you receive the bonus as wages, it is taxable income. You cannot reduce your tax liability by depositing it into a 401(k) or IRA after the fact. However, if your employer allows you to defer part of your bonus directly into a retirement plan before it is paid to you, that portion may reduce your taxable income for the year. Ask your payroll department whether this option is available.

Will I get a refund if my employer over-withheld on my bonus?

Possibly. If your employer withheld more than your actual tax liability for the year, you will receive a refund when you file your tax return. This often happens under the aggregate method, which can push you into a higher bracket temporarily. The refund depends on your total income, deductions, and credits for the entire year, not just the bonus.

How do I know which withholding method my employer uses?

Ask your payroll or human resources department directly. You can also check your pay stub when you receive the bonus — if the federal income tax withheld is exactly 22% of the bonus amount, your employer likely uses the percentage method. If the withholding is higher or lower, the aggregate method was probably used.