You were promised a $10,000 bonus. The check arrives, and somehow only about $6,000 lands in your bank account. Your regular paycheck never gets hit this hard — so why does the IRS take a bigger bite out of your bonus?
Short answer: it doesn't. Your bonus is taxed at exactly the same rates as the rest of your pay. What looks like a penalty is just a different withholding method, and every extra dollar withheld gets reconciled when you file your return. Here's how the rules actually work, when your employer can use the flat 22 percent rate, and what to do if your withholding is way off.
Bonuses Are "Supplemental Wages," Not Special Income
The IRS puts bonuses in a category called supplemental wages. That bucket also holds commissions, overtime pay, severance, back pay, taxable fringe benefits, sick pay paid by a third party, and income from exercised stock options or vested RSUs. Anything paid on top of your regular salary or hourly wages generally lands here.
Supplemental wages are ordinary income. They stack on top of your salary on your tax return and are taxed at your normal marginal rate. There is no separate "bonus tax rate" in the tax code. The only thing special is how your employer withholds federal income tax from these payments during the year — and the IRS gives employers two approved methods for doing it.
Method 1: The Optional 22 Percent Flat Rate
When your employer pays a bonus as a separate check — or clearly identifies it as separate from regular wages — it can withhold a flat 22 percent for federal income tax. No W-4 math, no bracket tables. A $10,000 bonus gets $2,200 in federal withholding, full stop.
Three conditions have to be met for the flat rate:
- Your supplemental wages from that employer are $1 million or less for the calendar year.
- Income tax was withheld from your regular wages in the current or preceding calendar year.
- The payment is separately identified from your regular pay.
Miss any of these and the employer must use the aggregate method instead. Note the $1 million test is per employer, per calendar year — a job change resets the counter.
The Mandatory 37 Percent Rate Above $1 Million
Once your supplemental wages from a single employer cross $1 million in a calendar year, the rules change hard. Every dollar above $1 million gets a mandatory 37 percent federal withholding — the top individual rate. This is not optional, and it overrides both the 22 percent flat rate and the aggregate method. It even applies if you have a Form W-4 on file claiming exemption from withholding.
In practice this mostly hits executives with large option exercises or seven-figure annual bonuses. The first $1 million is still withheld at the normal 22 percent (or via the aggregate method); only the excess takes the 37 percent hit.
Method 2: The Aggregate Method
Under the aggregate method, your employer adds the bonus to your regular wages for that pay period, computes withholding on the combined total as if you earned that much every period, then subtracts what was already withheld from your regular pay. The remainder comes out of the bonus.
This method is required when the bonus is paid together with regular wages and not separately identified, and whenever the flat-rate conditions aren't met. Some employers simply prefer it as a uniform policy.
Here's why it surprises people: lumping a $10,000 bonus onto a $4,000 biweekly paycheck makes the payroll system think you earn $14,000 every two weeks — a $364,000 annualized salary. That pushes the payment into higher withholding brackets, so the effective withholding on the bonus can easily exceed 22 percent. Employees who see 30 percent or more vanish from a bonus are almost always looking at aggregate-method withholding, not a higher tax.
Withholding Is Not Your Tax Bill
This is the single most misunderstood part of bonus taxation:
- Withholding is a deposit toward your annual tax bill, calculated by shortcut methods.
- Your actual tax on the bonus is your marginal income tax rate applied to your total income for the year.
If your marginal rate is 12 percent and 22 percent was withheld, the difference comes back to you as a refund. If your marginal rate is 32 percent, you'll owe the shortfall at filing time. Either way, the bonus itself is never "taxed at 22 percent" — that number is just the withholding shortcut.
The same logic explains a common complaint: "my bonus pushed me into a higher bracket." Only the dollars above the bracket line are taxed at the higher rate, and that would be true of a raise of the same size. Bonuses get no worse treatment than any other dollar you earn.
Don't Forget FICA and State Withholding
Federal income tax withholding is only part of the haircut. Supplemental wages are also subject to:
- Social Security tax at 6.2 percent, up to the annual wage base. If your salary already cleared the cap, your bonus escapes this one entirely.
- Medicare tax at 1.45 percent on every dollar, with no cap.
- Additional Medicare tax of 0.9 percent on wages above $200,000 ($250,000 for joint filers).
- State income tax withholding, where it gets interesting — because states don't follow one rule.
States Follow Their Own Playbooks
Some states mirror the federal approach with their own flat supplemental rates. California withholds 10.23 percent on bonuses and stock option income (and 6.6 percent on other supplemental pay like overtime and commissions). New York applies 11.7 percent. Other states have a single flat rate, some have no supplemental rate at all and just run bonuses through the regular withholding tables, and states without an income tax — Texas, Florida, Washington, and the rest — take nothing.
If you work in one state and live in another, bonuses can trigger withholding in both, with a credit sorting it out at filing time. Multi-state employees with big equity payouts should check this before April, not after.
The 2026 Wrinkle: Overtime and Tips Deductions Don't Change Withholding
The One Big Beautiful Bill Act created new deductions for qualified overtime and tips — but they are claimed on your tax return, not in your paycheck. Your employer keeps withholding federal income tax, Social Security, and Medicare from overtime and tips exactly as before. Starting with 2026, employers must separately report qualified overtime in W-2 Box 12 with code TT and qualified tips with code TP so you can claim the deduction at filing.
The practical consequence: if you earn significant overtime or tips, your withholding during the year will systematically overstate your final tax bill, and the difference arrives as a larger refund. The redesigned 2026 Form W-4 lets you adjust withholding to account for the expected deductions if you'd rather have the money during the year.
What Employers Get Wrong
If you run payroll — even for a handful of employees — supplemental wages are a reliable source of mistakes:
- Using the flat rate when it's not allowed. No income tax withheld from regular wages last year (a brand-new hire's first check, for example) means the aggregate method is required.
- Forgetting the $1 million tripwire. Payroll systems need a year-to-date supplemental-wages accumulator per employee. The 37 percent rate on the excess is mandatory, not elective.
- Treating the deduction as a withholding exclusion. The overtime and tips deductions don't reduce wages subject to withholding. Withhold first; the employee claims the benefit.
- State mismatches. Running a California bonus through federal-only logic — or applying one state's supplemental rate to a remote employee in another — creates under-withholding penalties.
- Skipping the gross-up decision. Some employers "gross up" bonuses — paying extra so the employee nets a round number after withholding. That requires solving backward from the target net amount through federal, FICA, state, and local rates. Decide the policy before bonus season, not during it.
What to Do If Your Withholding Looks Wrong
If too much was withheld from your bonus, you have two options. Do nothing and collect the refund at filing time — simplest, and effectively an interest-free loan to the government. Or file a new Form W-4 with your employer to reduce withholding on future paychecks, which pulls the money forward into the year. The IRS Tax Withholding Estimator walks through the exact numbers.
If too little was withheld — common when a big bonus lands on top of an already-high salary — consider the reverse: extra withholding per paycheck on your W-4, or quarterly estimated payments. Owing a large balance in April can mean an underpayment penalty on top of the tax.
If you're the employer, reconcile supplemental-wage withholding per employee before year-end. Verify the $1 million accumulator, confirm state rates for every work location, and make sure equity events and severance payments flowed through the right method. Catching a 37-percent-tripwire miss in December beats explaining it to the IRS later.
Keep Your Payroll Records Organized From Day One
Bonus season exposes every weakness in your payroll bookkeeping at once: per-employee supplemental-wage totals, federal and state withholding by method, FICA wage-base tracking, and the new Box 12 TT and TP reporting. When those numbers live in scattered spreadsheets, errors surface at the worst possible moment — during filing season.
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