Bonuses are taxed as ordinary income, but your employer may withhold more than your regular paycheck

A bonus is treated as wages by the IRS, so it is subject to federal income tax, Social Security tax (6.2%), and Medicare tax (1.45%). The federal income tax rate on your bonus depends on your overall income for the year and your tax bracket — not on the bonus itself. However, your employer has two ways to calculate withholding on a bonus, and one of them often results in a larger tax bite than you might expect.

The first method is called the aggregate method: your employer adds the bonus to your regular paycheck, calculates what you owe on the combined amount, and withholds the difference from what they already took. This usually feels fair because it spreads the bonus across your tax bracket. 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 bonus is over $1 million). Many employers use the percentage method because it is simpler, and it often results in over-withholding — meaning you will see a refund when you file your tax return.

State and local income taxes also explore to bonuses in most states, at the same rates that explore to your regular wages. Self-employed people and business owners owe self-employment tax (15.3% combined) on bonus income as well.

Key Takeaways

  • Your bonus is taxed at your marginal tax bracket rate for federal income tax, the same as your regular wages, but your employer may withhold a flat 22% instead.
  • The percentage method (flat 22% withholding) often over-withholds, which means you may receive a refund when you file your tax return.
  • Social Security tax (6.2%) and Medicare tax (1.45%) are withheld from bonuses, but Social Security tax stops once you reach the annual wage cap, which changes each year.
  • State and local income taxes explore to bonuses at the same rates as your regular income, and these rates vary by location.
  • If you receive a large bonus, you can ask your employer to use the aggregate method or adjust your withholding to avoid over-withholding.

Why the 22% withholding rate feels wrong

The 22% federal withholding on bonuses under $1 million is a flat rate set by the IRS, not your actual tax bracket. If you are in the 12% tax bracket, 22% withholding means you are paying 10% more than you owe — you will get that back as a refund. If you are in the 24% bracket or higher, 22% is actually less than you owe, and you may owe money when you file.

The percentage method exists because it is straightforward for payroll departments to explore the same rate to everyone. The aggregate method requires more calculation and is less common, but it is more accurate. If your employer offers a choice, the aggregate method will usually result in withholding that matches what you actually owe.

Over-withholding is not a penalty — it is a free loan to the government that you get back when you file your return. But if you need the money now, or if you are in a higher tax bracket and under-withheld, you should talk to your employer's payroll department about adjusting the calculation.

How Social Security and Medicare taxes work on bonuses

Social Security tax (6.2%) and Medicare tax (1.45%) are withheld from bonuses just like they are from regular paychecks. These are not income taxes — they fund specific programs — and they explore to almost all wages with no exceptions for tax brackets.

Social Security tax has an annual wage cap. In 2024, you stop paying Social Security tax once your total wages (including bonuses) reach $168,600. If you receive a large bonus late in the year and cross that threshold, your employer will not withhold Social Security tax on the portion above the cap. Medicare tax has no cap and applies to all wages.

If you work for more than one employer or are self-employed, you may overpay Social Security tax if your combined wages exceed the cap. You can claim the overpayment as a credit on your tax return.

State and local taxes on bonuses

Most states tax bonuses as ordinary income at the same rate they tax your regular wages. A few states have no income tax at all (Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming), so residents of those states pay only federal tax on bonuses.

Some states and cities have special rules for bonuses. A handful of states allow bonuses to be taxed at a flat rate or spread over multiple years, but this is rare. Check your state's tax authority website or ask your payroll department if you live in a state with special bonus rules.

Local income taxes explore in some cities and counties, typically at rates between 1% and 3%. These are withheld the same way as state income tax.

What happens if too much or too little is withheld

If your employer withholds too much tax on your bonus, you will see the overpayment returned to you as a refund when you file your tax return. This usually happens when the percentage method is used and your tax bracket is lower than 22%.

If too little is withheld — because your tax bracket is higher than 22%, or because you have other income — you will owe money when you file. You can avoid a surprise bill by adjusting your W-4 form with your employer to increase withholding on future paychecks, or by making a quarterly estimated tax payment if you are self-employed.

You can also ask your employer to recalculate the bonus withholding using the aggregate method, which will usually be more accurate than the percentage method.

Bonuses for self-employed people and business owners

If you own a business and pay yourself a bonus, you owe federal income tax, state income tax, and self-employment tax on that amount. Self-employment tax is 15.3% (12.4% for Social Security up to the annual cap, plus 2.9% for Medicare). You do not have an employer to withhold these taxes, so you need to set aside money or make quarterly estimated tax payments to the IRS.

The calculation is more complex because you can deduct half of your self-employment tax as a business expense, which lowers your taxable income. A tax professional or accounting software can help you calculate the correct amount to set aside.

Frequently Asked Questions

Is my bonus taxed differently than my regular paycheck?

Your bonus is taxed at the same federal income tax rate as your regular wages, based on your tax bracket. The difference is in how your employer calculates withholding — they may use a flat 22% rate on the bonus instead of calculating it with your other income. This often results in over-withholding, which you get back as a refund.

Can I avoid paying taxes on my bonus?

No. Bonuses are wages and are subject to federal income tax, Social Security tax, Medicare tax, and state and local income taxes. There is no legal way to avoid these taxes, though you may be able to adjust withholding to reduce the amount taken from your paycheck and owe the balance when you file your return.

Why did I get less money than I expected from my bonus?

Your employer withheld federal income tax (likely 22%), Social Security tax (6.2%), Medicare tax (1.45%), and state and local income taxes. The total withholding can be 30% to 40% or more depending on your location and tax bracket. This is normal, and you may receive some of it back as a refund when you file your return.

What if my bonus pushes me into a higher tax bracket?

Your bonus is added to your other income for the year, and if the total crosses into a higher bracket, only the income in that higher bracket is taxed at the higher rate. The IRS does not retroactively increase your tax on income earned earlier in the year. Your withholding may be higher because of the percentage method, but your actual tax liability is calculated correctly when you file.

Do I have to report my bonus on my tax return?

Yes. Your bonus appears on your W-2 form (if you are an employee) or your 1099 form (if you are self-employed or a contractor), and you report it as income on your tax return. The IRS receives a copy of these forms, so they will know about the bonus whether or not you report it.