Are you receiving a bonus this year? If so, congratulations! A bonus can be a welcome addition to your annual income, but before celebrating (and spending), it’s important to understand how bonuses are taxed and how to avoid surprises come April.
Bonuses are considered supplemental wages by the IRS, which means they’re taxed differently than your regular salary. Here’s what you need to know about how bonuses may impact your tax situation—and how proper planning can help reduce the bite.
How Bonuses Are Taxed
Supplemental income, as defined by the IRS, includes bonuses, commissions, overtime pay, and severance pay. Because of this classification, your bonus may be subject to a higher withholding rate than your regular paycheck.
There are two methods your employer can use to withhold taxes on your bonus:
- Percentage Method (Most Common) – The IRS requires a flat withholding rate of 22% for bonuses under $1 million (as of 2025). This means your employer will typically withhold 22% of your bonus for federal income taxes—regardless of your actual tax bracket.
Example: If you receive a $100,000 bonus, your employer will likely withhold $22,000 for federal taxes using this method.
Important Note for High Earners: If you’re in the top federal tax bracket of 37% in 2025, your actual tax liability on that $100,000 bonus could be $37,000. With only $22,000 withheld, you may owe an additional $15,000 when you file your tax return—unless other paycheck withholdings or estimated tax payments make up the difference.
For 2025, the 37% bracket applies to:
– Single filers with taxable income over $626,350
– Married couples filing jointly with taxable income over $751,600
*“Taxable income” is your gross income minus deductions and exemptions—not your total salary.
- Aggregate Method – Your employer adds the bonus to your most recent paycheck and withholds taxes based on the total, as if it were a single combined payment. This can result in a higher or lower withholding amount, depending on your total income and tax bracket.
Additional Bonus Taxes to Consider
- Social Security and Medicare: Your bonus is also subject to FICA taxes at a rate of 7.75%. This includes 6.2% for Social Security (up to the annual wage base limit) and 1.45% for Medicare. If your income exceeds a certain threshold, an additional 0.9% Medicare surtax may apply.
- State Taxes: Many states also tax bonuses. The withholding method and rate will vary depending on where you live.
Your Bonus May Not Be Taxed as Heavily as It Seems
It might feel like a large chunk of your bonus disappears to taxes, but that’s often due to the withholding method rather than your actual tax liability. When you file your tax return, the IRS looks at your total income and total taxes paid. If too much was withheld from your bonus, you could receive a refund. If too little was withheld, you may owe additional taxes.
This IRS tax withholding estimator is a useful tool for determining your annual income tax liability.
Strategies to Manage Bonus Taxation
- Adjust Your Withholding: If you know a bonus is coming, consider updating your Form W-4 to increase withholding for that pay period.
- Max Out Retirement Contributions: Redirect part of your bonus into a 401(k) or IRA to reduce your taxable income.
- Plan for Estimated Taxes: If you receive a large bonus and are concerned about underpayment penalties, making an estimated tax payment might be a smart move.
Questions About Your Bonus Taxes?
Bonuses are a great reward, but they come with important tax considerations. Understanding how your total compensation package may impact your taxes is part of our discussion with clients during our annual Strategic Tax Planning meetings.
If you need guidance on how to make sure your bonus works for you—not against you, or want to plan ahead for next tax season, our team can help. Contact us using the FREE CONSULT button below.
See related: How Restricted Stock Units May Impact Your Taxes
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