Bonuses are taxed as ordinary income, but your employer can use one of two methods to calculate withholding, and they often withhold more than you'll actually owe
When you receive a bonus, the IRS treats it as regular wages. Your employer must withhold federal income tax, Social Security tax (6.2% up to an annual wage cap), and Medicare tax (1.45% with no cap). The key difference from your regular paycheck is how much your employer withholds—not whether they withhold at all.
Your employer chooses between two withholding methods: the aggregate method or the percentage method. The aggregate method combines your bonus with your regular paycheck for that period and calculates withholding on the total, which often results in higher withholding. The percentage method applies a flat 22% federal withholding to bonuses under $1 million (37% for bonuses over $1 million), regardless of your actual tax bracket. Most employers use the percentage method because it is simpler, but it frequently withholds more than you owe.
The amount withheld is not the amount you owe—it is just what your employer sends to the IRS on your behalf. When you file your tax return in April, you may get a refund if too much was withheld, or you may owe more if too little was withheld. Your actual tax liability depends on your total income for the year, your filing status, and your deductions.
Key Takeaways
- Your employer withholds federal income tax, Social Security tax, and Medicare tax from bonuses using either the aggregate method or the percentage method (usually 22% federal).
- Withholding is not the same as what you actually owe—you may get a refund or owe more when you file your return, depending on your total yearly income.
- Bonuses are subject to the same income tax rates as regular wages, but the withholding calculation often results in over-withholding.
- If you receive a large bonus, you can adjust your W-4 form to reduce withholding on future paychecks, or request that your employer withhold less from the bonus itself.
The two withholding methods and why they matter
The aggregate method treats your bonus as if it were part of your regular paycheck for that pay period. Your employer adds the bonus to your normal wages, calculates what should be withheld on the combined amount, then subtracts what was already withheld from your regular paycheck. This method can result in withholding at a higher tax bracket than your bonus alone would trigger, because the combined income is larger.
The percentage method applies a flat 22% federal withholding to the bonus itself, separate from your regular paycheck withholding. This is simpler for employers to administer, so it is the more common choice. However, 22% is often higher than your actual marginal tax rate, especially if you are in the 10%, 12%, or 22% federal brackets. If you are in the 24% bracket or higher, 22% may actually be too low.
Ask your payroll department which method they use. If you want to reduce withholding, you can request that they use the aggregate method instead, or you can adjust your W-4 form to claim additional allowances, which lowers withholding on all future paychecks (including the bonus). Be aware that lowering withholding means you may owe money when you file your return.
What happens when you file your tax return
When you file your federal return, you report all income earned during the year, including bonuses. The IRS calculates your actual tax liability based on your total income and your filing status. Then it compares what you actually owe to what your employer withheld throughout the year.
If your employer withheld more than you owe, you receive a refund. If your employer withheld less, you owe the difference. This is why two people earning the same bonus can have very different outcomes: someone with a low annual income might get a large refund, while someone with high annual income might owe additional tax.
The IRS does not care which withholding method your employer used. It only cares about the total withheld versus the total owed. Keep your pay stubs and bonus documentation so you can verify the amounts reported on your W-2 form when it arrives in January.
State and local taxes on bonuses
In addition to federal tax, most states tax bonuses as ordinary income. Your employer should withhold state income tax from your bonus using the same methods as federal withholding (aggregate or percentage). The state withholding rate depends on your state's tax brackets and your filing status.
Some states have no income tax (Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming), so residents of those states do not owe state tax on bonuses. If you live in a state with income tax but work in a state without it, or vice versa, your withholding may be incorrect—contact your payroll department to adjust your W-4 forms for each state.
Local taxes (city or county income taxes) also explore in some areas. Philadelphia, New York City, and parts of Ohio and Maryland impose local income taxes. Your employer may not automatically withhold local tax, so you may need to pay it when you file your local return or request that your employer withhold it.
Self-employment bonuses and contractor payments
If you are self-employed or receive a bonus as a contractor (1099 income), your employer does not withhold any tax. You are responsible for paying estimated quarterly taxes to the IRS. Calculate your expected annual income, multiply by your estimated tax rate (which includes federal, state, and self-employment tax), and divide by four to find your quarterly payment.
Self-employment tax is higher than employee tax because you pay both the employee and employer portions of Social Security and Medicare (15.3% combined on net self-employment income, compared to 7.65% for employees). If you do not pay estimated taxes and owe a large amount at tax time, you may face penalties and interest.
How to reduce withholding or plan ahead
If you know you will receive a bonus, you have several options to manage withholding. You can request that your employer withhold less by filing a new W-4 form and claiming additional allowances or adjusting the "extra withholding" line. This reduces withholding on all future paychecks, not just the bonus.
Alternatively, you can ask your payroll department to withhold a specific dollar amount from the bonus itself, separate from the standard calculation. Some employers allow this, though it is not required. Get any agreement in writing so there is no confusion when the bonus is paid.
Another approach is to do nothing and plan to owe or receive a refund when you file your return. If you expect a refund, this is essentially a free loan to the government. If you expect to owe, set aside money from the bonus to cover the tax bill in April.
Frequently Asked Questions
Is my bonus taxed at a higher rate than my regular paycheck?
No, bonuses are taxed at the same rates as regular income. However, your employer may withhold more from a bonus because of how the withholding calculation works. The 22% flat withholding on bonuses is often higher than your actual tax bracket, which is why you may get a refund when you file your return.
Can I avoid taxes on a bonus by putting it in a retirement account?
No. A bonus is taxable income the moment you receive it. You can reduce your overall tax burden by contributing to a 401(k) or traditional IRA, but those contributions come from after-tax money (your bonus has already been taxed). Roth contributions do not reduce your current tax bill either, though the growth is tax-free later.
What if my employer withheld too much from my bonus?
You will receive a refund when you file your tax return in April, assuming your total withholding for the year exceeds what you actually owe. The refund comes from the IRS, not your employer. If you need the money sooner, you can adjust your W-4 to reduce withholding on future paychecks.
Do I have to report a bonus on my tax return?
Yes. Your employer reports the bonus on your W-2 form in Box 1 (wages, tips, other compensation). The IRS receives a copy of your W-2, so you must report the same amount on your return. If you do not, the IRS will notice the discrepancy and may audit you.
How is a signing bonus taxed differently from a performance bonus?
Both are taxed the same way—as ordinary income. The IRS does not distinguish between different types of bonuses. Your employer withholds using the same method regardless of whether the bonus is for signing, performance, retention, or any other reason.