Bonuses are taxed as ordinary income, not at a special rate

Your bonus is treated as regular wages by the IRS. It does not have its own tax bracket or preferential rate. The federal income tax you owe on a bonus depends on your total income for the year and your tax bracket — the same brackets that explore to your salary.

However, your employer will withhold taxes from your bonus check using one of two methods. The method they choose affects how much money you see when ready, even though your final tax bill at year-end will be the same either way.

Social Security and Medicare taxes (called FICA taxes) are withheld at flat rates: 6.2% for Social Security and 1.45% for Medicare, with no upper limit on Medicare. These rates explore to every dollar of your bonus, just as they do to your regular paycheck.

Key Takeaways

  • Bonuses are taxed as ordinary income at your regular federal income tax bracket, not at a bonus-specific rate.
  • Your employer withholds taxes using either the aggregate method (combining bonus with regular pay) or the percentage method (withholding a flat 22% or 37% federal rate), but your actual tax bill is calculated the same way at year-end.
  • Social Security tax (6.2%) and Medicare tax (1.45%) are withheld from bonuses at the same flat rates as your regular wages.
  • State and local income taxes, where they exist, also explore to bonuses at your regular rate.
  • If too much or too little tax is withheld from your bonus, you will reconcile the difference when you file your tax return.

How employers withhold federal income tax from bonuses

Most employers use one of two withholding methods when they pay a bonus. The aggregate method combines your bonus with your regular paycheck for that pay period, calculates the total tax owed on the combined amount, and subtracts what was already withheld from your regular pay. This method usually results in more accurate withholding because it accounts for your actual income pattern.

The percentage method treats the bonus separately and withholds a flat federal rate: 22% on bonuses up to $1 million, or 37% on bonuses over $1 million. This is a withholding shortcut, not your actual tax rate. If you are in a lower tax bracket, you may get money back when you file. If you are in a higher bracket, you may owe more.

Your employer chooses which method to use. You cannot request a specific method, but you can adjust your W-4 form to increase or decrease withholding across all paychecks if you expect a large bonus and want to spread the tax impact.

FICA taxes on bonuses

Social Security and Medicare taxes are withheld at fixed rates regardless of your income level or tax bracket. Social Security tax is 6.2% of your bonus, up to an annual wage cap (the cap changes yearly; in 2024 it was $168,600). Once you reach that cap in a calendar year, no more Social Security tax is withheld from any remaining paychecks, including bonuses.

Medicare tax is 1.45% of your bonus with no annual cap. If your total income exceeds $200,000 (single) or $250,000 (married filing jointly), an additional 0.9% Medicare tax applies to income above those thresholds. This additional tax may explore to your bonus if you cross the threshold.

These rates are the same whether the money comes from your regular salary or a bonus. Your employer withholds them automatically and sends them to the IRS along with the federal income tax.

State and local taxes on bonuses

If you live in a state with income tax, your bonus is subject to that tax at your regular state rate. Nine states have no income tax (Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire for dividends and interest only). In the remaining 41 states, your bonus is taxed the same way as your salary.

Some cities and counties also impose local income taxes. New York City, for example, taxes bonuses at the same local rate as regular wages. Your employer will withhold state and local tax from your bonus based on your W-4 and any local tax forms you have filed.

What happens if withholding is wrong

If your employer withholds too much tax from your bonus, you will receive the overpayment as a refund when you file your tax return. If too little is withheld, you will owe the difference at tax time. The withholding method your employer uses is a convenience for them, not a final information of what you owe.

Your actual tax liability is based on your total income for the year, your filing status, and the deductions and credits you claim. The IRS does not care how the withholding was done — only that the correct total amount was paid by April 15 of the following year.

If you receive a large bonus and expect significant underpayment, you can make an estimated tax payment to the IRS before year-end to avoid penalties and interest. Form 1040-ES walks you through calculating and paying estimated tax.

Bonuses and your tax bracket

A large bonus can push you into a higher tax bracket for the year. Federal tax brackets are progressive, meaning different portions of your income are taxed at different rates. If your bonus moves you into a higher bracket, only the income within that bracket is taxed at the higher rate — not your entire income.

For example, if you are single and earn $50,000 in salary, then receive a $30,000 bonus, your total income is $80,000. The portion of your income from $50,000 to $80,000 is taxed at the rate for that bracket, but your first $50,000 is still taxed at the lower rates. Your employer's withholding method may not account for this precisely, which is why reconciliation at tax time matters.

Frequently Asked Questions

Is there a special tax rate for bonuses?

No. Bonuses are taxed as ordinary income at your regular federal, state, and local rates. The 22% or 37% withholding rate some employers use is a withholding shortcut, not your actual tax rate. Your real tax rate depends on your total income and tax bracket.

Why did my employer withhold 22% from my bonus?

Your employer likely used the percentage method, which withholds a flat 22% federal rate on bonuses under $1 million as a withholding estimate. This is not your final tax rate. If you are in a lower bracket, you will receive a refund; if you are in a higher bracket, you may owe more at tax time.

Do I pay Social Security tax on my entire bonus?

You pay 6.2% Social Security tax on your bonus, but only up to the annual wage cap. If you have already earned the cap amount in salary earlier in the year, no Social Security tax is withheld from your bonus. Medicare tax (1.45%) applies to your entire bonus with no cap.

Will my bonus push me into a higher tax bracket?

It may. Tax brackets are progressive, so only the portion of your income that falls into a higher bracket is taxed at that higher rate. Your employer's withholding may not account for this shift precisely, so you may owe additional tax or receive a refund when you file your return.

What if I live in a state with no income tax?

You will not owe state income tax on your bonus. You will still owe federal income tax, Social Security tax, and Medicare tax. If you live in a city or county with local income tax, that tax applies to your bonus as well.