How Are Bonuses Taxed?
Quick Answer
Bonuses are taxed as ordinary income, but they are often withheld at a flat 22% federal rate (for bonuses under $1 million), which is why your bonus check looks smaller than expected. This 22% is just the withholding rate, not your actual tax rate. When you file your tax return, the bonus is combined with your regular income and taxed at your normal marginal rate. If too much was withheld, you get a refund.
The Two Methods for Withholding on Bonuses
The IRS gives employers two options:
Method 1: Flat Rate (Most Common)
The employer withholds a flat 22% for federal income tax on bonuses up to $1 million. For amounts exceeding $1 million, the rate is 37% on the excess. This is simpler for payroll and is used by most companies.
Method 2: Aggregate Method
The employer combines your bonus with your regular paycheck and calculates withholding on the total as if it were a single payment. This can result in higher withholding because the system sees an inflated regular paycheck and assumes you earn that amount every period.
Real Example With Actual Numbers
Katie earns $85,000 in California and receives a $10,000 year-end bonus.
Withholding on the Bonus (Flat Rate Method)
| Withholding | Rate | Amount |
|---|---|---|
| Federal income tax | 22% | $2,200 |
| Social Security | 6.2% | $620 |
| Medicare | 1.45% | $145 |
| California state tax | ~6.6% | $660 |
| CA SDI | 1.1% | $110 |
| Total withheld | $3,735 | |
| Bonus take-home | $6,265 |
Katie keeps about 63% of her bonus after withholding. But her actual tax rate on the bonus may differ. If her marginal federal rate is 22%, the withholding is spot-on. If she is actually in the 12% bracket, she would get the difference back when filing.
Use the SalaryHog calculator to see how your bonus adds to your annual income.
What If the Bonus Were $2 Million?
| Portion | Federal Withholding Rate |
|---|---|
| First $1,000,000 | 22% = $220,000 |
| Remaining $1,000,000 | 37% = $370,000 |
| Total federal withholding | $590,000 |
Why Bonuses Feel Over-Taxed
The 22% flat withholding rate is higher than many people's effective tax rate. If your effective federal rate is 14%, a 22% withholding on your bonus means you temporarily overpaid. The IRS reconciles this when you file. This is a withholding issue, not a tax rate issue.
Additionally, bonuses are subject to the full FICA treatment — 6.2% Social Security (up to the wage cap) and 1.45% Medicare — making the total hit feel even larger.
Strategies to Keep More of Your Bonus
Boost your 401(k) before the bonus arrives: If your employer allows it, temporarily increase your 401(k) contribution percentage. A $10,000 bonus with a 20% 401(k) rate means $2,000 goes pre-tax to retirement.
Contribute to an HSA: HSA contributions through payroll reduce the taxable amount of your bonus.
Adjust your W-4: If you know a bonus is coming and expect over-withholding, adjust your W-4 for the surrounding pay periods to reduce overall withholding.
Track your total compensation: Bonuses are part of your total compensation, so factor them into annual tax planning rather than treating them as a surprise.
Model your full salary plus bonus at the SalaryHog calculator to see your complete tax picture.