Federal income tax withholding on an employee bonus usually comes out at a flat 22%, but that flat rate is a withholding shortcut, not your final tax bill. The employee bonus tax rules treat bonuses as “supplemental wages,” which means your employer can either withhold that flat 22% or lump the bonus into your regular paycheck and withhold at your ordinary rate. On top of income tax, the bonus is subject to Social Security and Medicare, and the true tax you owe gets settled when you file your return.
How Federal Income Tax Is Withheld on a Bonus
The IRS classifies bonuses as supplemental wages, and employers pick between two withholding methods.
The Percentage (Flat Rate) Method
When a bonus is paid separately from regular wages, or the employer specifies the bonus amount within a combined payment, the employer can withhold a flat 22% for federal income tax. No other percentage is allowed under this method. On a $5,000 bonus, exactly $1,100 goes to federal income tax withholding before FICA taxes are applied.
The Aggregate Method
Under the aggregate method, the employer combines your bonus with your regular wages for the current pay period and calculates withholding on the entire sum as if it were a single paycheck. The tax already withheld from your regular wages is subtracted, and the remainder is withheld from the bonus. This method often produces a larger withholding amount, because lumping the bonus into one paycheck can push the combined total into a higher withholding bracket for that period.
Bonuses Above $1 Million
If your bonus pushes past the $1 million mark in total supplemental wages for the calendar year, the rules change. Any amount above $1 million is subject to mandatory 37% withholding, regardless of your W-4 elections or which method was used on earlier payments.
Withholding Is Not Your Final Tax Bill
The 22% flat rate is a withholding mechanism, not a tax rate. Your actual tax on the bonus depends on your total taxable income for the year, your filing status, and your marginal bracket. If you’re in the 12% bracket, your employer may have overwithheld, and you’ll get the excess back as a refund when you file. If you’re in the 32% bracket, 22% withholding wasn’t enough, and you’ll owe the difference. Either way, the true tax bill gets settled on your annual return.
Social Security and Medicare Taxes on Bonuses
Whichever income tax withholding method your employer uses, bonuses are subject to Social Security and Medicare taxes. Social Security tax applies at 6.2% on earnings up to the wage base, which is $184,500 for 2026. If your regular salary already exceeds that ceiling, no additional Social Security tax comes out of the bonus. If your salary is below the ceiling but the bonus pushes you over, only the portion up to $184,500 in total earnings is taxed.
Medicare tax has no wage cap. The standard 1.45% rate applies to the full bonus amount. If your total wages for the year exceed $200,000 (or $250,000 for married couples filing jointly), an additional 0.9% Medicare surtax kicks in on the excess. A large year-end bonus can easily push you over that threshold.
Gift Cards and Non-Cash Bonuses Are Taxed Too
A common misconception is that a small gift card or merchandise award flies under the tax radar. It doesn’t. The IRS treats gift cards, gift certificates, and gift coupons as cash equivalents, meaning they can never qualify for the de minimis fringe benefit exclusion regardless of face value. A $25 coffee shop gift card handed out at a holiday party is taxable income, just like a $25 addition to your paycheck.
Achievement awards for length of service or safety milestones can sometimes be excluded from income, but only if they take the form of tangible personal property selected from a limited catalog. The moment the award is cash, a gift card, or anything easily converted to cash, the exclusion vanishes. Your employer must include the value of any taxable non-cash bonus on your W-2 and withhold employment taxes on it.
When a Bonus Increases Your Overtime Pay
If you’re a non-exempt employee earning overtime, the type of bonus you receive changes what your employer owes you. Federal regulations draw a sharp line between discretionary and non-discretionary bonuses.
A truly discretionary bonus exists only when the employer keeps complete control over both whether to pay and how much to pay, with that decision made close to the end of the relevant period. There can be no prior promise, no formula, and no contract creating an expectation. If your employer announces in January that everyone who hits quota will get a $2,000 bonus in December, discretion has been abandoned the moment that announcement is made.
Non-discretionary bonuses include any payments promised or expected based on specific criteria: attendance awards, production targets, quality metrics, commissions spelled out in an employment agreement, and bonuses announced to motivate better performance. The fact that the employer technically has the option not to pay doesn’t make the bonus discretionary if employees reasonably expect it.
Under the Fair Labor Standards Act, all non-discretionary bonuses must be included in your “regular rate of pay” when calculating overtime. Take total compensation for the week (including the non-discretionary bonus), divide by total hours worked, and that gives you the regular rate. Multiply by 0.5, then by the number of overtime hours, to get the additional overtime premium. If a worker earns $1,000 in base pay plus a $200 production bonus in a 50-hour week, the regular rate is $24 per hour ($1,200 รท 50), and the employer owes an extra $12 per overtime hour for the 10 overtime hours, totaling $120 in additional overtime pay.
An employer who violates the FLSA’s overtime provisions owes the unpaid wages plus an equal amount in liquidated damages, effectively doubling the cost. For repeated or willful violations, the Department of Labor can also impose civil money penalties adjusted upward for inflation each year.
When You Have to Pay a Bonus Back
Sign-on bonuses routinely include repayment clauses requiring you to return part or all of the payment if you leave before a specified date. Whether these clauses hold up depends largely on state law and whether the bonus is classified as earned wages at the time of repayment.
If you repay a bonus in the same calendar year you received it, the fix is relatively simple: your employer adjusts your W-2 to reflect the lower amount, and you’re only taxed on what you actually kept. The headache starts when the repayment happens in a later tax year, because you already paid taxes on that money.
For repayments over $3,000, federal tax law gives you two options under the “claim of right” doctrine. You can deduct the repaid amount in the year you pay it back, or you can calculate the tax credit you’d get by removing that income from the earlier year’s return, and use whichever method produces a lower tax bill. For repayments of $3,000 or less, you’re limited to taking a deduction in the repayment year.
When You’re Legally Owed the Bonus
Once you’ve met every condition for a non-discretionary bonus, the payment generally becomes a vested wage. Many jurisdictions treat earned bonuses the same as base salary, meaning your employer can’t simply decide not to pay. Employment contracts typically specify the payment date. When the contract is silent, the bonus must be paid within a reasonable time after the end of the performance period.
Termination complicates things. If you’ve already satisfied the bonus criteria before your last day, most legal frameworks expect the employer to pay out the earned amount, whether pro-rated or in full. Forfeiture clauses requiring active employment on the payout date get challenged frequently, and courts often side with the worker when the underlying work was already completed. The specifics vary by jurisdiction, so the language of your offer letter or employment agreement is the first place to look.
Delays in payment can trigger statutory penalties in many states, sometimes accruing daily until the employer pays up. Lawsuits over unpaid bonuses also tend to include claims for attorney fees, which can quickly dwarf the bonus itself. Keep copies of your offer letter, bonus plan documents, and any written communications confirming the terms.
If You’re an Independent Contractor
The rules above assume you’re a W-2 employee. If you’re an independent contractor, the tax mechanics are different. The company paying your bonus doesn’t withhold income tax or FICA; instead, you’re responsible for paying self-employment tax and estimated income tax yourself. For 2026, companies must report bonus payments to contractors on Form 1099-NEC when total payments reach the $2,000 reporting threshold, which increased from $600 for tax years beginning after 2025.
The FLSA’s overtime and regular-rate rules don’t apply to independent contractors either. A contractor’s bonus is simply additional nonemployee compensation, reported and taxed accordingly.