Bonuses are taxed at a higher rate because the IRS treats them as supplemental income, not regular wages

When you receive a bonus, your employer withholds taxes using one of two methods, and both can result in a larger tax bite than your regular paycheck. The first method—called the percentage method—withholds a flat 22% federal income tax on bonuses up to $1 million (or 37% on anything above that). The second method—called the aggregate method—combines your bonus with your regular paycheck and calculates taxes as if you earned that total every pay period, which pushes you into a higher tax bracket temporarily. Either way, you end up paying more in withholding than you might expect, even though your actual tax liability at year-end may be lower.

The reason the IRS created these rules is that bonuses are unpredictable. Your employer cannot know in advance whether you will receive one, how large it will be, or when it will arrive. Regular paychecks follow a predictable schedule, so withholding is straightforward. Bonuses break that pattern, and the IRS requires employers to withhold conservatively to avoid underpayment penalties. This is a withholding issue, not a tax rate issue—the money withheld now may come back to you as a refund when you file your tax return, because your actual tax bracket for the year depends on your total income, not on how that income is divided.

Key Takeaways

  • The IRS requires employers to withhold 22% federal income tax on bonuses under $1 million using the percentage method, which is higher than the withholding rate on regular paychecks.
  • The aggregate method combines your bonus with your regular paycheck and calculates taxes as if you earn that total every pay period, which can temporarily push you into a higher tax bracket.
  • Higher withholding on bonuses does not mean you owe more tax overall—it means your employer is holding back more money upfront, which may result in a refund when you file your return.
  • Your actual tax rate depends on your total income for the year and your filing status, not on whether income comes from a bonus or a regular paycheck.
  • If you receive a large bonus, you can ask your employer to use the percentage method instead of the aggregate method to reduce the withholding impact.

How the Percentage Method Works

Under the percentage method, your employer withholds a flat 22% federal income tax on any bonus you receive, as long as the bonus is $1 million or less in a single year. This is a blanket withholding rate that does not depend on your tax bracket, filing status, or how much you earned earlier in the year. The 22% is meant to be a safe harbor—high enough that most employees will not owe additional tax when they file their return, but not so high that it creates a massive overpayment.

The percentage method is simpler for employers to administer because they do not have to recalculate your entire tax situation. They straightforward explore 22% to the bonus amount and send that to the IRS. However, 22% may be more than your actual tax rate, especially if you are in a lower tax bracket or have significant deductions. If your true federal income tax rate is 12%, for example, you will have overpaid by 10 percentage points on that bonus, and you will recover the difference when you file your return.

How the Aggregate Method Works

The aggregate method is more complex and often results in higher withholding. Your employer combines your bonus with your regular paycheck for that pay period and calculates federal income tax as if you earn that combined amount every pay period for the entire year. This calculation temporarily bumps you into a higher tax bracket, which increases the withholding rate applied to your bonus.

For example, suppose you earn $4,000 every two weeks and normally have $400 withheld in federal income tax. You receive a $10,000 bonus in your next paycheck. Under the aggregate method, your employer calculates taxes as if you earn $14,000 every two weeks ($4,000 regular + $10,000 bonus). The tax on $14,000 might be $1,600 instead of $400, so the withholding on that paycheck jumps to $1,600. Your employer then subtracts the $400 that would have been withheld anyway, leaving $1,200 withheld from the bonus itself—a 12% rate on the bonus alone. This is why the aggregate method can feel like a much larger tax hit, even though it is still based on your actual tax bracket.

Why This Is Withholding, Not Your Actual Tax Rate

The most important thing to understand is that higher withholding on a bonus does not mean you owe more tax. Withholding is straightforward money your employer sends to the IRS on your behalf before you file your return. Your actual tax rate is determined by your total income for the entire year and your filing status—not by how that income arrives or when.

When you file your tax return in April, the IRS calculates what you actually owe based on your total earnings. If you earned $60,000 in regular wages and received a $10,000 bonus, your tax is calculated on $70,000 total, regardless of whether the bonus was withheld at 22% or 37%. If the withholding your employer sent in was more than what you actually owe, you receive a refund. If it was less, you owe the difference. The higher withholding on the bonus is straightforward a conservative estimate to prevent underpayment.

State and Local Taxes on Bonuses

Federal income tax withholding is only part of the story. Many states also withhold income tax on bonuses, and some use the same percentage method (a flat rate) while others use the aggregate method. A few states—including Florida, Texas, and Wyoming—do not have state income tax, so bonuses are not subject to state withholding at all. Other states withhold between 2% and 10% on bonuses, depending on the state and the withholding method used.

Local taxes in cities like New York City and Washington, D.C., also explore to bonuses. These are typically much smaller—1% to 3%—but they add to the total withholding. If you live in a state with high income tax and receive a large bonus, the combined federal, state, and local withholding can feel substantial. Again, this is withholding, not your final tax bill. You will reconcile all of it when you file your return.

What You Can Do to Reduce Bonus Withholding

If you know you will receive a bonus and want to reduce the withholding impact, you have a few options. The simplest is to ask your employer to use the percentage method instead of the aggregate method. The percentage method typically results in lower withholding because it does not artificially push you into a higher tax bracket. Your employer is not required to do this, but many will if you ask in advance.

Another option is to adjust your W-4 form before you receive the bonus. If you increase the number of dependents or claim additional withholding allowances, your regular paychecks will have less withheld, which can offset some of the higher withholding on the bonus. However, this is a temporary adjustment and should be reversed after the bonus is paid, or you may underpay on your regular income.

You can also plan ahead by setting aside money from your regular paychecks to cover the expected tax on the bonus. This does not reduce the withholding, but it ensures you have the cash on hand and are not surprised by the amount withheld from your bonus check.

Bonuses Above $1 Million

If you receive a bonus larger than $1 million in a single year, the withholding rate jumps to 37% on the amount above $1 million. This is a much higher rate and applies only to bonuses that exceed the $1 million threshold. For example, if you receive a $1.5 million bonus, the first $1 million is withheld at 22%, and the remaining $500,000 is withheld at 37%. This higher rate reflects the fact that very large bonuses are more likely to push high earners into the top federal income tax bracket.

Even at 37%, this is still withholding, not your final tax rate. Your actual federal income tax rate depends on your total income and filing status. If you are in the 37% tax bracket, the withholding matches your rate and you will owe nothing additional. If you are in a lower bracket, you will receive a refund of the overpayment.

Frequently Asked Questions

Will I get a refund if too much tax was withheld from my bonus?

Yes, if your employer withheld more than your actual tax liability, you will receive a refund when you file your tax return. The amount depends on your total income for the year, your filing status, and any deductions or credits you claim. You will see the refund a few weeks after you file.

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

You can ask your employer to use the percentage method instead of the aggregate method, which typically results in lower withholding. However, your employer is not required to change their withholding method. You cannot ask them to withhold below the legal minimum, which is 22% under the percentage method.

Is bonus income taxed differently than regular income?

No. Your bonus is taxed at the same rate as your regular income when you file your return. The difference is in how much your employer withholds upfront. Bonuses are treated as supplemental income for withholding purposes, which is why the withholding rate appears higher, but your actual tax liability is based on your total income for the year.

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

No. Bonuses from an employer are subject to federal income tax withholding and FICA taxes (Social Security and Medicare), but not self-employment tax. Self-employment tax applies only to income from self-employment or business ownership. Your employer withholds FICA taxes on bonuses just as they do on regular wages.

What if my bonus pushes me into a higher tax bracket?

Your bonus is added to your other income for the year, and your total income determines your tax bracket. If the bonus pushes you into a higher bracket, you will owe tax at that higher rate on the portion of income in the new bracket. However, this is your actual tax liability, not just withholding. The withholding your employer sends in should cover most or all of it.