Your bonus is taxed as ordinary income, but the withholding method often takes more than you owe

A bonus is taxed the same way as your regular salary — it counts as ordinary income and is subject to federal income tax, Social Security tax (6.2%), and Medicare tax (1.45%). The difference is not the tax rate itself, but how much your employer withholds upfront.

When you receive a bonus, your employer can use one of two withholding methods. The first, called the aggregate method, adds your bonus to your regular paycheck and calculates withholding based on your total pay for that period. The second, called the percentage method, withholds a flat 22% federal income tax on the bonus alone (or 37% if your total bonuses for the year exceed $1 million). Most employers use the percentage method because it is simpler, and that flat rate is why your bonus often feels heavily taxed — 22% is usually more than your actual tax bracket.

The key point: you are not paying a higher tax rate on the bonus itself. You are paying withholding that may be higher than what you actually owe. When you file your tax return in April, you may get some of that money back as a refund if the withholding exceeded your true tax liability.

Key Takeaways

  • Bonuses are taxed as regular income at your ordinary tax rate, but employers often withhold 22% upfront using the percentage method, which is usually more than you owe.
  • The aggregate method adds your bonus to your regular paycheck and calculates withholding based on your total pay that period, which may result in less withholding.
  • The difference between what is withheld and what you actually owe is settled when you file your tax return — you may receive a refund if too much was withheld.
  • State and local income taxes explore to bonuses in the same way as regular wages, and the rate depends on where you live and work.

Why the 22% withholding feels like a bonus tax

The 22% flat withholding rate exists because the IRS needs a straightforward rule that works for most people. Your actual federal income tax bracket — the percentage of your income that goes to federal tax — is likely lower than 22% unless you earn a high income. If you are in the 12% bracket, for example, a 22% withholding means your employer is setting aside more than you will actually owe.

This overpayment is not lost. It sits with the IRS until you file your return and claim it back. The longer you wait to file, the longer the government holds your money interest-free. This is why many people feel like bonuses are taxed more heavily than regular pay — the withholding is front-loaded, even though the actual tax rate is not.

How the aggregate method works differently

If your employer uses the aggregate method instead, they treat your bonus as part of your regular paycheck for that pay period. If you normally earn $2,000 per paycheck and receive a $5,000 bonus, your employer calculates withholding on $7,000 total, then subtracts what was already withheld from your regular $2,000 paycheck.

This method often results in lower withholding on the bonus itself, because the calculation spreads the bonus across your normal tax situation. However, it is more work for payroll, so many employers stick with the simpler 22% flat rate. You can ask your HR or payroll department which method they use, though you may not be able to change it — the choice is up to your employer.

State and local taxes on bonuses

In addition to federal withholding, most states tax bonuses as ordinary income. The state rate depends on where you live and where you work. If you live in a state with no income tax — such as Texas, Florida, or Wyoming — you will not owe state tax on your bonus. If you live in a high-tax state like California or New York, state withholding can add another 5% to 13% on top of federal.

Some cities also tax income. New York City, for example, imposes a local income tax of roughly 3.9% on residents. Your employer should withhold for all applicable state and local taxes, but the amount varies widely depending on where you live. Check your pay stub to see what was withheld for each jurisdiction.

What happens when you file your tax return

When you file your federal return in April, you report all income earned during the year, including bonuses. The IRS calculates your actual tax liability based on your total income and your tax bracket. If the amount withheld from your bonus (and all other paychecks) exceeds what you owe, you receive a refund. If it falls short, you owe the difference.

Most people who receive bonuses and use the 22% withholding method end up with a refund, because 22% is higher than their actual bracket. The size of the refund depends on your total income for the year and your filing status. Keep your pay stubs and any bonus documentation so you have a record of what was withheld.

Bonuses and Social Security and Medicare taxes

In addition to income tax withholding, bonuses are subject to Social Security tax (6.2%) and Medicare tax (1.45%), just like regular wages. These are withheld automatically and do not come back as a refund — they fund your Social Security and Medicare accounts.

There is one exception: the Social Security tax has a wage cap. In 2024, you pay Social Security tax only on the first $168,600 of wages in a calendar year. If your bonus pushes you over that cap, the excess is not subject to the 6.2% Social Security tax. Medicare tax has no cap and applies to all wages. Your payroll department handles this calculation automatically.

How to reduce withholding on future bonuses

If you consistently receive a large refund because of bonus withholding, you have a few options. First, you can ask your HR department whether they will use the aggregate method instead of the percentage method — this may lower the withholding on the bonus itself. Second, you can adjust your W-4 form to claim additional withholding allowances, which reduces withholding on your regular paychecks throughout the year, offsetting the higher withholding on the bonus.

Be cautious with this approach: if you reduce withholding too much, you may end up owing money at tax time instead of receiving a refund. The goal is to get as close as possible to zero — neither a large refund nor a large bill. If you are unsure how to adjust your W-4, speak with a tax professional or use the IRS withholding calculator on irs.gov.

Frequently Asked Questions

Is my bonus taxed at a higher rate than my regular salary?

No. Your bonus is taxed at the same rate as your regular income — your ordinary tax bracket. The 22% withholding is just an upfront estimate, not your actual tax rate. When you file your return, the IRS calculates what you truly owe, and you may receive a refund if too much was withheld.

Can I avoid paying taxes on a bonus?

No. Bonuses are income and are subject to federal, state, and local taxes (where applicable) just like regular wages. There is no legal way to exclude a bonus from taxation, though you can reduce your overall tax burden through retirement contributions or other deductions claimed on your return.

Why did my bonus withholding seem so high?

Your employer likely used the 22% flat withholding method, which is higher than most people's actual tax bracket. This is a conservative estimate to may support enough tax is set aside. The overpayment is refunded when you file your return in April.

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

No. Self-employment tax applies only to income from self-employment or business ownership. If you are a W-2 employee, your bonus is subject to regular Social Security and Medicare taxes (7.65% combined), which are withheld automatically by your employer.

What if my employer withheld too little tax on my bonus?

You will owe the difference when you file your return. To avoid this in the future, you can ask your employer to increase withholding on bonuses, or you can adjust your W-4 to increase withholding on regular paychecks throughout the year.