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 must withhold federal income tax, Social Security tax (6.2 percent), and Medicare tax (1.45 percent). The key difference from your regular paycheck is how much federal income tax gets withheld — and that depends on which withholding method your employer uses.

Most employers use the aggregate method, which combines your bonus with your regular pay for that period and calculates withholding as if that combined amount were your normal paycheck. This usually results in less federal withholding on the bonus itself. Some employers use the percentage method, which withholds a flat 22 percent federal tax on bonuses up to $1 million in a year (37 percent on anything above that). The percentage method typically withholds more.

Either way, you will owe the same total tax when you file your return — the difference is just timing and how much comes out of the bonus check versus your regular paychecks. If too little was withheld, you will owe money in April. If too much was withheld, you will get a refund.

Key Takeaways

  • Bonuses are taxed as regular income at your marginal tax rate, plus Social Security and Medicare taxes.
  • Your employer chooses between the aggregate method (usually less withholding) and the percentage method (usually more withholding), but you owe the same total tax either way.
  • Federal withholding on bonuses is separate from your regular paycheck calculation, which can make your bonus check smaller than you expect.
  • State and local income taxes also explore to bonuses in most states, and the rate depends on where you live and work.

Why your bonus withholding is different from your regular paycheck

Your regular paycheck uses annualized withholding. Your employer divides your annual salary by the number of pay periods, assumes you earn that amount every period, and withholds based on that pattern. A bonus breaks that pattern.

Under the aggregate method, your employer adds the bonus to your regular paycheck for that period, calculates what the total withholding would be on that combined amount, then subtracts what was already withheld on your regular pay. The result is the withholding on the bonus. If you are in a high tax bracket and your bonus pushes you into an even higher one, you will see more withholding. If your bonus is small relative to your regular pay, you may see less.

Under the percentage method, your employer straightforward withholds 22 percent of the bonus (or 37 percent if your bonuses exceed $1 million in the calendar year). This is simpler to calculate but often results in more federal tax coming out of the bonus check than you will actually owe.

Federal income tax rates on bonuses

Your bonus is taxed at your marginal tax rate — the tax bracket your total income falls into. For 2024, federal tax brackets range from 10 percent to 37 percent depending on your filing status and total income. A bonus does not get its own tax rate; it is added to your other income and taxed at whatever bracket that combined total reaches.

If you earn $60,000 a year and receive a $10,000 bonus, your taxable income becomes $70,000. You pay federal income tax on that $70,000 at the rates for your filing status. You do not pay 22 percent on the bonus and 12 percent on your salary — you pay the blended rate that applies to the full $70,000.

This is why the percentage method (22 percent withholding) often over-withholds. If your marginal rate is 12 percent, the 22 percent withholding takes out more than you will owe, and you will see that money back as a refund in April. If your marginal rate is 32 percent, the 22 percent withholding is not enough, and you will owe more when you file.

Social Security and Medicare taxes on bonuses

Bonuses are also subject to FICA taxes — Social Security (6.2 percent) and Medicare (1.45 percent) — just like your regular wages. These are withheld the same way regardless of which federal withholding method your employer uses.

Social Security tax only applies to the first $168,600 of income in 2024 (this threshold changes each year). If your salary plus bonus exceeds that amount, you will not pay Social Security tax on the portion above it. Medicare tax applies to all wages with no cap, though there is an additional 0.9 percent Medicare tax on wages over $200,000 (single) or $250,000 (married filing jointly).

If you have already hit the Social Security wage cap earlier in the year through your regular paychecks, your bonus will not be subject to the 6.2 percent Social Security tax. Your employer's payroll system tracks this automatically.

State and local income taxes on bonuses

Most states tax bonuses as ordinary income at the same rate as your regular wages. Nine states have no income tax at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (which taxes only dividends and interest, not wages). In the remaining states, your bonus is subject to state income tax withholding.

Some states use a flat tax rate — Colorado and Illinois both tax all income at a single rate. Others use progressive brackets like the federal system. A few states have special rules for bonuses. For example, some allow bonuses to be taxed at a lower rate if they are paid in a separate check from your regular paycheck, though this is rare and varies by state.

If you work in a city or county with a local income tax (common in Ohio, Pennsylvania, Kentucky, and a few other places), your bonus is usually subject to that tax as well. The rate depends on your location and employer location, not your home address.

What happens if too much or too little was withheld

Withholding is just an estimate. When you file your tax return, you report all your income — salary, bonuses, and everything else — and calculate what you actually owe. If your employer withheld more than that, you get a refund. If they withheld less, you owe the difference.

You can adjust your withholding for future paychecks by submitting a new W-4 form to your employer. If you know you will receive a large bonus and want to reduce withholding on your regular paychecks to offset it, you can claim additional allowances on your W-4. If you want to increase withholding to avoid owing money in April, you can request extra withholding per paycheck.

Some people prefer to let their employer over-withhold on bonuses and treat the refund as forced savings. Others adjust their W-4 to get closer to zero at tax time. Either approach is fine — it is just a matter of when you want access to the money.

Bonuses and your tax bracket

A large bonus can push you into a higher tax bracket, but only the income above the bracket threshold is taxed at the higher rate. This is a common misconception. If you are single and earn $50,000, and you receive a $30,000 bonus, you do not pay the higher bracket rate on the entire $80,000. You pay the rate for $50,000 to $80,000, which is only the portion that falls in the higher bracket.

For 2024, single filers in the 22 percent bracket earn between $11,601 and $47,150. The 24 percent bracket runs from $47,151 to $100,525. If your salary is $45,000 and you get a $10,000 bonus, the first $2,150 of the bonus is taxed at 22 percent (to fill out the $47,150 threshold), and the remaining $7,850 is taxed at 24 percent. You do not jump to 24 percent on the whole bonus.

Frequently Asked Questions

Is a bonus taxed differently than a regular paycheck?

The total tax you owe is the same — your bonus is taxed as ordinary income at your marginal rate. The difference is in withholding. Your employer may withhold a different amount from a bonus check than from a regular paycheck, but you settle the actual tax owed when you file your return.

Can I avoid taxes on a bonus?

No. Bonuses are taxable income. You cannot defer them, exclude them, or reduce the tax through any legal strategy available to most employees. You can only control the timing of withholding through your W-4.

What if my employer withheld 22 percent but I owe more?

You will owe the difference when you file your tax return. If your marginal tax rate is higher than 22 percent, the flat withholding under the percentage method will not cover your full tax liability. You can request extra withholding on your regular paychecks for the rest of the year, or plan to pay the balance in April.

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

No. Self-employment tax only applies to income from self-employment or business ownership. If you are a W-2 employee, you pay FICA taxes (Social Security and Medicare) on your bonus, which your employer withholds. Self-employment tax is different and only applies to 1099 contractors and business owners.

Does a bonus affect my tax refund?

Yes. A bonus increases your total income for the year, which can reduce your refund or turn it into a balance owed. It can also affect your may be able to access for certain tax credits that phase out at higher income levels. When you file your return, your bonus is included in your total income, and your refund or balance is calculated based on that full amount.