Bonuses are taxed at a higher rate because your employer withholds tax using a simplified method that assumes you earn that bonus amount every pay period

When you receive a bonus, your employer must withhold federal income tax from it. The IRS allows two methods: the percentage method and the aggregate method. Most employers use the percentage method because it is faster. Under this method, your employer withholds a flat 22% on bonuses up to $1 million in a calendar year, and 37% on anything above that. This is not your actual tax rate—it is just how much your employer sets aside.

The reason this feels like a higher rate is that your regular paycheck uses a different calculation. When you fill out your W-4, you tell your employer how many dependents you have and what your total annual income will be. Your employer then spreads your tax burden across all your paychecks for the year. A bonus does not fit into that annual plan, so your employer cannot use the same calculation. Instead, the percentage method applies a flat withholding that is often higher than what you will actually owe.

Key Takeaways

  • Your employer withholds 22% on bonuses under the percentage method, which is a flat rate that does not account for your personal tax situation.
  • Your regular paycheck uses your W-4 information to spread tax withholding across the year, which usually results in a lower withholding rate.
  • The amount withheld from your bonus is not the same as the tax you owe—you may get some or all of it back when you file your return.
  • The aggregate method, used by some employers, combines your bonus with your regular paycheck and may result in lower withholding, but fewer employers use it.
  • Your actual tax bracket does not change when you receive a bonus, but the withholding method makes it appear that way.

How the percentage method works

Under the percentage method, your employer withholds a set percentage from your bonus without looking at your W-4 or your income for the rest of the year. For bonuses paid in 2024, the rate is 22% for amounts up to $1 million. If your bonus exceeds $1 million, the excess is taxed at 37%.

This method is straightforward for payroll departments: they calculate the bonus amount, multiply by 22%, and send that to the IRS. They do not need to know your filing status, your other income, or your deductions. The downside is that 22% is often more than you actually owe in tax on that bonus, especially if you are in a lower tax bracket or have significant deductions.

How the aggregate method works differently

Some employers use the aggregate method instead. This method combines your bonus with your regular paycheck for that pay period and calculates withholding as if that combined amount is your normal paycheck. Your employer then subtracts the tax already withheld from your regular paycheck and only withholds the difference from your bonus.

The aggregate method often results in lower withholding on your bonus because it accounts for your W-4 information and your tax bracket. However, it requires more work from payroll, so many employers stick with the percentage method. If your employer offers a choice, you can ask which method they use and whether you can request the aggregate method instead.

Why the withholding does not equal your actual tax

The amount withheld from your bonus is not the same as the tax you actually owe on it. Withholding is an estimate—money your employer sends to the IRS on your behalf throughout the year. Your actual tax is calculated when you file your return based on your total income, deductions, and credits for the entire year.

If your employer withheld 22% from a $5,000 bonus, that is $1,100 sent to the IRS. But if you are in the 12% tax bracket and have deductions that reduce your taxable income, you might owe only $600 in actual tax on that bonus. In that case, you would get $500 back when you file. Conversely, if you are in the 24% bracket, you might owe $1,200, meaning you would owe an additional $100 at tax time.

How your tax bracket affects the real impact

Your tax bracket determines how much of your bonus you actually owe in federal income tax. The United States uses a progressive tax system, meaning different portions of your income are taxed at different rates. In 2024, if you are single and earn $47,150 to $100,525, you are in the 22% bracket. If you earn less, you are in a lower bracket; if you earn more, you are in a higher one.

The 22% withholding rate on bonuses happens to match the 22% tax bracket, but that is coincidence. If you are in the 12% bracket, the 22% withholding is too high. If you are in the 24% bracket, it is too low. Your actual tax liability on the bonus depends on your total income for the year, not on the withholding method your employer chose.

What happens when you file your tax return

When you file your federal income tax return, the IRS adds up all your income for the year, including your bonus, and calculates your true tax liability. It then credits all the withholding your employer sent in throughout the year, including the amount withheld from your bonus. If too much was withheld, you get a refund. If too little was withheld, you owe the difference.

This is why many people who receive a bonus end up with a larger refund than they expected. The 22% withholding on the bonus was higher than their actual tax rate, so they overpaid during the year. When they file, they get that overpayment back.

How to reduce withholding on future bonuses

If you consistently owe money or get a large refund because of bonus withholding, you have a few options. First, you can ask your employer's payroll department whether they use the percentage method or the aggregate method, and request the aggregate method if available. This may lower the withholding on your bonus.

Second, you can adjust your W-4 to account for expected bonus income. If you know you will receive a $10,000 bonus, you can tell your employer to withhold less from your regular paychecks so that the total withholding for the year is closer to your actual tax liability. The IRS W-4 form has a section for other income and extra withholding that can help with this.

Third, you can plan ahead. If you know a bonus is coming and you want to avoid a large tax bill or refund, set aside some of the bonus money yourself and pay estimated taxes to the IRS. This gives you more control over your withholding and can help you break even at tax time.

Frequently Asked Questions

Will my bonus push me into a higher tax bracket?

Not necessarily. Your tax bracket is based on your total income for the year, and the bonus is added to that total. If the bonus pushes your income into the next bracket, only the income in that higher bracket is taxed at the higher rate. The rest of your income is still taxed at your original rate. However, the bonus can increase your overall tax liability, which is different from moving you into a higher bracket.

Can I ask my employer to withhold less from my bonus?

You cannot ask your employer to withhold less than the law requires. However, you can ask whether they use the percentage method or the aggregate method, and request the aggregate method if available. You can also adjust your W-4 to account for the bonus, which may reduce withholding on your regular paychecks and balance things out over the year.

What if I receive a bonus and then leave my job?

The withholding on your bonus is still sent to the IRS and credited to your tax account. When you file your return for that year, the IRS will calculate your actual tax liability based on all your income, including the bonus and any income from your new job. You will either get a refund or owe additional tax depending on your total income and withholding for the year.

Is the 22% withholding on bonuses the same as my income tax rate?

No. The 22% is a withholding rate set by the IRS for the percentage method. Your actual income tax rate depends on your tax bracket, which is determined by your total income for the year. The 22% withholding is often higher or lower than what you actually owe, which is why you may get a refund or owe money when you file.

Do state and local taxes explore to bonuses the same way?

State and local tax withholding on bonuses varies by location. Some states use a flat percentage, others use the aggregate method, and some have different rules entirely. Contact your state tax authority or ask your payroll department how your state handles bonus withholding.