How Bonus Taxation Actually Works

Bonuses get taxed differently than regular paychecks, and that shocks people. Your employer has two ways to withhold taxes on bonuses: the percentage method and the aggregate method. Both follow IRS rules, both feel painful, and neither matches what most people expect.

Percentage Method (22% Flat)

This is the most common approach. If your bonus is paid separately from your regular wages and is under $1 million, your employer withholds a flat 22% for federal income tax. Then they add Social Security (6.2%) and Medicare (1.45%) on top. Total withholding is usually around 29.65% of your gross bonus.

So a $10,000 bonus becomes $7,035 after federal withholding and FICA. You lose nearly $3,000 before you see a dollar. This catches people off guard every single time.

Aggregate Method (Variable Rate)

If your bonus is combined with your regular paycheck, or if your employer chooses this method, they calculate withholding as if you earn your salary plus your bonus every pay period all year long. This pushes you into higher tax brackets temporarily, so withholding can be 25%, 30%, or even higher.

For example, if you make $60,000 annually and get a $5,000 bonus on your regular bi-weekly paycheck, the system treats it like you’re suddenly making $190,000 annually. Withholding spikes for that one paycheck.

Why Bonuses Feel So Heavily Taxed

Bonuses are supplemental wages. The IRS requires different withholding rules because they’re extra income on top of your regular pay. The 22% flat rate is designed to be roughly accurate for middle-income earners, but it’s not perfect for everyone.

If your regular tax rate is 12%, you’ll get money back at tax time because 22% was over-withheld. If your regular rate is 32%, you might owe more because 22% wasn’t enough. Either way, the withholding hits your bonus check hard, and that’s what people remember.

Social Security and Medicare Don’t Care

FICA taxes (Social Security and Medicare) treat bonuses exactly like regular wages. You pay 6.2% for Social Security (up to the annual limit of $168,600 in 2025) and 1.45% for Medicare on every dollar. No exceptions, no breaks. If you’re already over the Social Security cap from your regular salary, you don’t pay that 6.2% on the bonus, which helps a bit.

Bonus Over $1 Million? Different Rules

If your bonus exceeds $1 million, the IRS mandates a different withholding structure. The first $1 million is withheld at 22%. Everything above $1 million is withheld at 37% (the top federal tax rate). Plus FICA on top. So if you get a $2 million bonus, expect to keep about $1.2 million after federal withholding and FICA. The rest goes to taxes.

Common Bonus Mistakes People Make

Spending the gross amount before seeing the net. You get told you’re getting a $5,000 bonus and mentally spend $5,000. Then your check arrives with $3,500, and you’re confused and angry. Always calculate take-home first.

Assuming withholding equals final tax. It doesn’t. Withholding is your employer’s best guess. Your actual tax depends on your total income, deductions, and credits. You might get some back. You might owe more. Don’t assume the withholding is final.

Forgetting state tax exists. Federal withholding is only part of the hit. State tax (if your state has one) will take another chunk. A $10,000 bonus in California might net you $6,500 after all taxes. In Texas, you might keep $7,000 because there’s no state income tax.

Not adjusting W-4 for big bonuses. If you get a large bonus and you’re already in a high tax bracket, 22% withholding might not be enough. You could owe thousands at tax time. Consider increasing withholding on your regular paychecks or setting aside extra from your bonus.

Treating bonuses as guaranteed income. Bonuses are discretionary. They can disappear, get reduced, or get delayed. Never build your baseline budget around bonus income. Treat it as extra for savings, debt payoff, or one-time expenses.

What If My Bonus Is Irregular?

Some people get annual bonuses. Some get quarterly. Some get performance bonuses whenever targets are hit. Irregular bonuses make budgeting harder because you can’t predict the timing or amount. Save aggressively when bonuses arrive. Don’t increase your lifestyle based on them. Use bonuses for goals: emergency fund, debt payoff, big purchases, retirement catch-up.

What If I Get Multiple Bonuses in One Year?

Each bonus gets withheld separately using the same rules. But at tax time, all your income (salary plus all bonuses) gets combined. If you got three $10,000 bonuses throughout the year, that’s $30,000 in bonus income on top of your salary. You might jump into a higher tax bracket, meaning you’ll owe more at tax time even though each bonus had 22% withheld.

What If I Leave Before Getting My Bonus?

Most bonuses have conditions. If you quit or get fired before the bonus payout date, you usually forfeit it. Some companies pro-rate bonuses based on time worked. Others require you to be employed on the payout date to receive anything. Read your employment contract or bonus plan carefully. Leaving right before a big bonus can cost you thousands.

What If My Bonus Gets Clawed Back?

Some companies have clawback provisions. If you leave within a certain time after receiving a bonus, you might have to repay it. Or if the company misses targets after paying bonuses, they might reclaim them. This is more common in finance and executive roles. If you spent the money and then owe it back, you’re in a tough spot. Keep bonus money liquid for a few months before committing it to big expenses.

What About Sign-On Bonuses?

Sign-on bonuses are also supplemental wages, so they get taxed the same way. A $15,000 sign-on bonus will net you about $10,500 after federal withholding and FICA. Many sign-on bonuses come with repayment clauses. If you leave within a year or two, you have to pay it back. Factor that risk into your job decisions.

Real Bonus Tax Examples

Gross Bonus	Method	Federal Withholding	FICA	Est. Take-Home
$2,000	Percentage	$440	$153	~$1,407
$5,000	Percentage	$1,100	$383	~$3,517
$10,000	Percentage	$2,200	$765	~$7,035
$25,000	Percentage	$5,500	$1,913	~$17,587
$50,000	Percentage	$11,000	$3,825	~$35,175

Estimates based on 2025 federal supplemental withholding only. State tax will reduce take-home further. FICA assumes earnings under Social Security cap.

Should I Ask for Salary Instead of Bonus?

Sometimes. Salary is more stable and predictable. Bonuses are volatile and discretionary. But bonuses can also be larger than a salary increase. A $5,000 raise is $5,000 every year, compounding over time. A $5,000 bonus is one-time. From a long-term wealth perspective, salary usually wins. From a short-term cash perspective, bonuses can be better if they’re large and consistent.

Can I Reduce Withholding on My Bonus?

Not easily. Your employer is required to follow IRS withholding rules. You can’t just tell them to withhold less. However, if you think you’re going to be over-withheld for the year, you can adjust your W-4 on your regular paychecks to reduce withholding there, which gives you more cash flow throughout the year instead of waiting for a refund. But this requires careful planning and understanding of your total tax situation.

Budget Planning with Bonuses

Never budget baseline expenses (rent, food, insurance) on bonus income. Bonuses are extra. Use them for goals that don’t require monthly cash flow: emergency fund, debt payoff, big purchases, vacations, retirement catch-up. If bonuses stop, your core budget shouldn’t collapse.

Frequently Asked Questions

Why is my bonus taxed so high?

Bonuses are supplemental wages. The IRS requires different withholding rules. The standard rate is 22% for federal income tax, plus 6.2% Social Security and 1.45% Medicare. That’s about 30% total withholding. It feels high because it all comes out at once, unlike regular paychecks where you’re used to the withholding.

Will I get some of this back at tax time?

Maybe. If your actual tax rate is lower than 22%, yes, you’ll get a refund. If your rate is higher, you might owe more. Withholding is just an estimate. Your final tax is based on your total annual income and deductions.

Is there any way to keep more of my bonus?

Legally, not really. The withholding rules are set by the IRS. But you can reduce your taxable income by maxing out pre-tax retirement contributions (401k, HSA) which lowers your overall tax burden. Some people also time bonuses strategically (early in the year vs. late) to optimize their tax situation, but this requires careful planning with a tax professional.

Should I use my bonus to pay off debt?

Depends on the interest rate. High-interest debt (credit cards at 20%+) should absolutely be paid off with bonus money. That’s a guaranteed 20% return. Low-interest debt (mortgage at 3-4%) is less urgent. You might get better returns investing the money. Run the numbers based on your specific situation.

What if my employer withholds more than 22%?

That can happen with the aggregate method, especially if your bonus is large relative to your salary. It’s legal and follows IRS rules. You’ll likely get a refund at tax time if too much was withheld. Check your paystub to see which method was used.

Do I pay city or local tax on bonuses too?

If your city has income tax (like New York City, Philadelphia, Detroit), yes. Bonuses are income, so they’re subject to all the same taxes as regular wages: federal, state, local, FICA. The total bite can be 35% to 45% depending on where you live.

Can I negotiate how my bonus is paid?

Sometimes. Some employers will split large bonuses across multiple pay periods to reduce the withholding hit (using aggregate method across several checks can lower the spike). Others will allow you to defer part of your bonus into retirement accounts pre-tax. Ask HR what options exist.

What’s the biggest mistake people make with bonuses?

Spending the gross amount before seeing the net. You hear “$10,000 bonus” and start planning what to do with $10,000. Then you get $7,000 and feel cheated. Always calculate take-home first, then decide how to use that amount. Bonuses look bigger on paper than they are in your bank account.