Many employees are surprised by the high taxes on their bonuses, but the reality is straightforward: there is no separate “bonus tax rate.” Instead, bonuses are taxed as ordinary income, just like your regular salary. The confusion arises from how employers handle tax withholding on these payments.
How Bonus Withholding Works
The Internal Revenue Service (IRS) categorizes bonuses as “supplemental wages,” which includes commissions, overtime pay, severance packages, and even reported tips. While the tax rate doesn’t change, the IRS allows employers to use different withholding methods that can make it appear as though bonuses are taxed at a higher rate.
There are two main methods:
- Flat Withholding Method: If your bonus is paid separately from your regular wages, your employer is required to withhold 22% for federal taxes if your total supplemental wages remain under $1 million for the year. If they exceed this amount, the withholding rate jumps to 37%. These rates are clearly outlined in IRS Publication 15.
- Aggregate Method: When a bonus is included in the same paycheck as your regular wages, your employer may combine the amounts and calculate withholding as if that larger total were your standard income. This can result in higher withholding because it temporarily assumes you earn that increased amount every pay period.
Withholding vs. Actual Tax Liability
The key takeaway is that withholding is simply a prepayment of your taxes, not the final amount you’ll owe. The IRS uses federal income tax brackets, which change annually, to determine your actual tax liability. For 2025, these brackets range from 10% to 37%, depending on your filing status and income level. If too much was withheld, you’ll receive a refund; if too little, you’ll pay the difference when you file your return.
Marginal Tax System: Bonuses Don’t Automatically Push You Into a Higher Bracket
Many mistakenly believe a bonus automatically forces all of their income into a higher tax bracket. The federal tax system is marginal, meaning only the portion of your income that falls within each bracket is taxed at that rate. For example, in 2025, a single filer would only pay the higher rate on income above each threshold.
Payroll Taxes and State Taxes
Beyond federal income tax, bonuses are also subject to Social Security (6.2% up to the annual wage base) and Medicare taxes (1.45% with no income cap). Many paychecks will show deductions of 30% or more as a result. State taxes also apply, with some states using flat supplemental withholding rates (California) or allowing either flat or aggregate withholding (New York).
Reducing Your Tax Burden
You can’t reduce taxes on a bonus specifically, but you can lower your overall taxable income through strategies like:
- Increasing contributions to your 401(k)
- Contributing to a traditional IRA
- Funding a Health Savings Account (HSA)
- Timing income strategically between tax years
Conclusion
There is no special bonus tax rate. The higher withholding on bonuses is simply a result of IRS rules governing supplemental wages. Understanding the difference between withholding and actual tax liability is essential for effective financial planning and avoiding surprises during tax season.
