How Bonuses Are Taxed

Bonuses are taxed as ordinary income — but because employers withhold at a flat 22% federal rate (or aggregate with your salary), many employees face a surprise tax bill or refund at year end.

Bonuses are taxed as ordinary income — the same as your salary — at your marginal federal and state income tax rate. This is the correct answer and the source of widespread confusion: many employees believe bonuses are taxed at a 'higher rate,' but the rate itself is not higher. What changes is the withholding method, and the gap between withholding and actual tax owed is what creates the jarring effect of receiving a bonus that feels heavily clawed back.

The IRS allows employers to use two withholding methods for bonuses. The percentage method (also called the flat withholding method) withholds a flat 22% federal income tax on bonus amounts up to $1 million (37% above $1 million) regardless of your tax bracket. This is the most common method for separately-paid bonuses and is the source of the '22% bonus tax' shorthand. The aggregate method adds the bonus to your regular paycheck and withholds based on the total — if you're paid $6,000/month and receive a $12,000 bonus in one check, withholding is calculated on $18,000, which may push the effective withholding rate much higher than 22%. Neither method determines your actual tax liability — that's calculated on your total annual income when you file your return.

The practical implication: if your marginal tax rate is below 22%, the flat withholding method over-withholds and you'll get a refund at tax time. If your marginal rate is above 22% (income above ~$89,075 for single filers in 2024), you may be under-withheld and could owe additional taxes when you file. Employees in high marginal brackets who receive large bonuses sometimes make estimated tax payments to avoid underpayment penalties. For bonuses paid in equity (RSUs or options exercised), the withholding and tax mechanics are more complex and often require active planning.

The Two Withholding Methods Explained

The percentage method withholds 22% federal tax on supplemental wages (bonuses, commissions, overtime) regardless of your salary level — it's simple, predictable, and often misinterpreted as 'the bonus tax rate.' The aggregate method combines your bonus with your regular paycheck and calculates withholding on the total using your W-4 elections — this can result in a much higher withholding percentage because the combined paycheck falls into a higher bracket for withholding calculation purposes. Both are withholding methods, not tax rates: your actual tax owed is determined by your total annual income at filing, not by how the employer withheld. If too much is withheld, you get a refund; if too little, you owe the difference.

Planning Around Bonus Taxes

  • Max your 401(k) or HSA contributions around bonus time — pre-tax contributions reduce taxable income dollar-for-dollar, and many employers allow you to temporarily increase your contribution rate.
  • If your marginal rate is above 22%, set aside the difference (e.g., 10% more) when you receive a flat-withheld bonus to cover the tax bill at filing.
  • Timing: if you can defer a year-end bonus into next year (when income may be lower), the after-tax value may be higher. Discuss with a tax advisor.
  • California and New York City residents: state and local tax withheld on bonuses can be substantial — CA withholds at 10.23%, NYC at ~3.876% on top of NY state.
  • Equity compensation (RSUs, NSOs): these trigger ordinary income tax at vesting or exercise. Work with a tax professional when large equity events are pending.

Example

An employee in the 32% federal tax bracket receives a $20,000 bonus. Her employer uses the flat method and withholds 22% ($4,400). At tax time, she owes 32% of $20,000 ($6,400 federal) — meaning she's under-withheld by $2,000 and owes that when she files. Had she known, she could have made a $5,000 401(k) contribution from the bonus, reducing her taxable bonus to $15,000 and her additional tax owed to just $200.