How Bonuses Are Taxed: The Complete Guide

You were promised a $10,000 bonus. The deposit shows $6,800. Nothing went wrong — this is exactly how the U.S. tax system handles bonus pay, and once you understand the mechanics it stops feeling like a mystery (or a robbery).

This guide explains precisely why bonuses shrink, the rules your employer is following, and how much of that 'missing' money you tend to get back. Want the number for your own bonus first? Our bonus tax calculator gives you an instant estimate.

What counts as 'supplemental' pay

The IRS splits your compensation into two buckets. Regular wages are your normal salary or hourly pay. Supplemental wages are everything paid on top of that — and they follow special withholding rules.

Supplemental wages include:

• Annual and performance bonuses
• Sign-on and retention bonuses
• Commissions
• Overtime (in some payroll setups)
• Severance pay
• Cash awards and prizes
• Back pay and retroactive raises
• Payouts of accumulated leave

The label matters because supplemental wages get withheld differently from your salary — and that difference is the entire reason your bonus looks smaller than you expected.

The 22% rule (and the 37% rule)

For supplemental wages under $1 million in a calendar year, the federal flat withholding rate is 22%. For any supplemental wages above $1 million, the portion over the threshold is withheld at 37%.

This is the single most misunderstood point about bonuses. People say their bonus was 'taxed at 40%.' What actually happened is that 40% was withheld across federal, FICA, and state — and some of that comes back.

Percentage method vs. aggregate method

Employers pick one of two ways to withhold on a bonus, and the choice can change your check meaningfully.

1. The percentage (flat) method

If the bonus is paid as a separate check, the employer can simply withhold the flat 22%. Clean and predictable. This is the most common approach.

2. The aggregate method

If the bonus is lumped into a regular paycheck, the employer combines the two, calculates withholding as if that combined amount were your normal pay for every period of the year, and withholds accordingly. Because payroll software annualizes that inflated check, it can temporarily push you into a much higher withholding bracket — which is why a bonus paid this way sometimes loses an eye-watering share up front.

FICA and state tax stack on top

The 22% is only the federal income-tax piece. Your bonus also faces:

• Social Security: 6.2% (up to the annual wage cap)
• Medicare: 1.45% (plus 0.9% above $200,000)
• State income tax: 0% to ~10%+ depending on where you live

Add it up and a resident of a high-tax state can see 35–40% withheld. A resident of a no-income-tax state keeps noticeably more of the same bonus.

How you get the over-withheld money back

Here's the part that softens the blow. Withholding is a prepayment toward your total annual tax. If 22% (plus FICA and state) was more than you actually owed on that income, the excess comes back as part of your tax refund the following spring.

If your marginal tax rate is 12% but your bonus was withheld at 22% federal, you effectively pre-paid 10 extra percentage points — which returns to you at tax time, assuming the rest of your return is in order.

The flip side: annual and performance bonuses are sometimes under-withheld for high earners (the 22% flat rate is below their marginal rate), which creates a surprise bill. If you're a high earner, plan for that gap.

Legitimate ways to lower the hit

You can't dodge the withholding method, but you can shrink the taxable amount:

• Defer into a 401(k): Many plans let you direct a bonus into pre-tax retirement savings.
• Top up an HSA: If you have a high-deductible health plan, HSA contributions are pre-tax.
• Time deductible expenses: Charitable giving or other deductions in the same year can offset the income.

Frequently asked questions