You just received a bonus, amazing! But before you plan that celebratory splurge, there’s something you need to know: Uncle Sam is about to take a bite out of your bonus check.
So how are bonuses taxed? Well for starters, bonuses can be subject to a different withholding rate than your regular paycheck. Here’s everything you need to know about the tax rate on bonuses so you can keep more of that well-earned cash in your pocket.
What is a bonus?
A bonus is an additional pay your employer gives you, typically for exceptional performance, meeting company goals, or as a holiday perk. According to the IRS, bonuses are considered “supplemental wages,” which means they’re taxed differently than your regular income.
Other examples of supplemental wages include:
- Overtime pay
- Commissions
- Severance pay
- Back pay
- Tips
Your bonus isn’t just “extra cash”, it’s taxable income, which brings us to the big question: how is a bonus taxed?
How are bonuses taxed?
Understanding how much are work bonuses taxed depends on whether your employer uses the percentage method or the aggregate method, which calculates taxes based on your combined income.
The percentage method
The percentage method bonus tax rate applies a flat 22% federal tax rate to any bonus payment under $1 million. For bonuses over $1 million, the rate increases to 37%. This is the most common method for taxing bonuses.
Here’s how it works:
- Your employer calculates your bonus separately from your regular paycheck.
- The flat rate of 22% is applied to the bonus amount.
Example: Let’s say you receive a $5,000 bonus:
- $5,000 x 22% = $1,100 in taxes
- You’ll take home $3,900 after taxes
| Advantages | Disadvantages |
| Straightforward and predictable | It might feel like a big chunk is taken out, especially for smaller bonuses. |
| Keeps your bonus separate from your regular wages for easier tax planning. |
The aggregate method
The aggregate method combines your bonus with your regular paycheck and calculates withholding as if that total amount was your regular pay. Here’s how it works:
Example: If you earn $3,000 biweekly and receive a $2,000 bonus:
- Total income for the pay period = $5,000
- Taxes are calculated based on the combined income and your regular tax bracket.
| Advantages | Disadvantages |
| This could result in lower taxes if your combined income keeps you in a lower bracket. | Complicated to calculate and often results in higher withholding upfront. |
Are all bonuses taxable?
Yes, all bonuses are generally taxable as supplemental wages. The only exceptions are certain minimal non-cash gifts ($25-100 value) that qualify as de minimis fringe benefits under IRS rules.
| Generally taxable | Generally non-taxable |
| $1,000 performance bonus | Holiday gift basket under $75 |
| $500 gift card from employer | $25 birthday gift card |
| Company car bonus (taxed at fair market value) | Coffee mug with logo |
When are taxes on bonuses paid?
The taxes on your bonus are typically withheld by your employer at the time of payment. This means you’ll see the deduction on your bonus check before it even hits your account. The actual tax owed will be reconciled when you file your annual tax return.
Is it possible to avoid taxes on bonuses?
While you can’t completely dodge the tax on bonus, there are strategies to reduce the impact.
- Review your W-4: Adjusting your W-4 can help balance how much tax is withheld from your bonus. Speak with HR to tweak your withholdings.
- Request separate payment: Ask your employer to pay your bonus separately from your regular paycheck to ensure it’s taxed at the flat 22% bonus check tax rate instead of the aggregate method.
- Make charitable contributions: Direct a portion of your bonus to a qualified charitable organization. Donations reduce your taxable income and might help you score a deduction.
- Contribute to retirement accounts: Use your bonus to max out contributions to your 401(k), HSA, or IRA. These contributions lower your taxable income and help you save for the future.
- Utilize tax deductions: Plan your expenses to take advantage of deductions like mortgage interest or education expenses, reducing your overall tax burden.
Wrapping it up: bonuses and taxes
Bonuses are a fantastic perk, but understanding the bonus tax rate and how taxes are applied ensures you’re not blindsided when the IRS takes its share.
Whether your bonus is taxed using the percentage method or aggregate method, you can minimize the impact with smart planning. Keep more of your hard-earned cash by exploring tax-friendly strategies like retirement contributions and charitable donations.
FAQs
Do bonuses get taxed?
Yes, bonuses are considered taxable income and are subject to federal, state, and sometimes local taxes.
Are bonuses taxed differently than regular income?
Bonuses are taxed at the same rates as regular income – the only difference is the initial withholding rates (22% for bonuses vs. your regular paycheck rate). When you file your tax return, bonuses are combined with your regular income and taxed at your overall tax bracket rates.
Why are bonuses taxed so high?
Bonuses aren’t actually taxed higher – they’re just withheld at a higher rate (22% federal) for immediate tax purposes. When you file your tax return, bonuses are taxed at the same rate as your regular income. The higher withholding helps prevent owing additional taxes later since bonuses can push you into a higher tax bracket.
Are bonuses subject to both federal and state taxes?
Yes, bonuses are subject to federal and state taxes, and sometimes local taxes as well.
Do employers pay taxes on bonuses?
Yes, employers are responsible for paying payroll taxes on bonuses, including Social Security and Medicare contributions.
Why is my bonus taxed at 40%?
If your bonus appears taxed at 40%, it’s likely due to combined withholdings for federal, state, and payroll taxes, plus deductions like Social Security.
Do year-end bonuses affect my overall tax bracket?
Yes, bonuses are added to your total annual income and can potentially push you into a higher tax bracket.
