Bonuses are taxed federally as ordinary income, but because the IRS treats them as “supplemental wages,” your employer usually withholds federal income tax at a flat 22% when the bonus is paid as a separate check. That 22% is a withholding rate, not your final tax rate. What you actually owe on the bonus is determined when you file your return and the money gets folded in with the rest of your income.
So the number you see missing from your bonus check and the number the IRS ultimately keeps are two different things. Understanding the gap is the whole game.
The Two Ways Employers Withhold on a Bonus
Federal rules give employers two methods for withholding income tax from a bonus, and which one your employer uses explains most of the confusion about bonus taxation.
The Percentage Method: Flat 22%
When a bonus is paid as a separate payment from your regular paycheck, most payroll departments apply a flat 22% federal income tax withholding to the bonus amount. Your W-4 and your tax bracket don’t change this; the rate is 22% on the bonus, full stop.1Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide – Section: 7. Supplemental Wages
On a $5,000 bonus, that is $1,100 taken out for federal income tax before FICA. Payroll teams like this approach because it’s fast and predictable. If your marginal bracket turns out to be 12%, you overpaid and get the difference back as a refund. If your bracket is 32%, you underpaid and owe the difference when you file.
The Aggregate Method: Combined With Your Paycheck
If your employer pays the bonus inside the same paycheck as your regular wages, a different calculation applies. Your employer adds the bonus to the regular pay for that period and withholds federal income tax on the combined amount as if it were a single large paycheck, then subtracts the amount that would have been withheld from the regular wages alone. The remainder comes out of the bonus.1Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide – Section: 7. Supplemental Wages
Because the combined paycheck gets annualized into a much higher income figure, the withholding on the bonus portion often lands well above 22%. If you normally earn $2,500 every two weeks and receive a $5,000 bonus in the same check, the payroll system sees $7,500 for that period, treats it like an annualized salary near $195,000, and withholds accordingly. The bonus slice can end up withheld at 24% or 32% instead of 22%.
This is the most common reason people feel their bonus was taxed more than it should have been. It wasn’t taxed more. It was withheld more aggressively. The actual tax is still worked out when you file.
FICA Comes Out Too
Federal income tax withholding is only half of what’s taken from a bonus. FICA taxes, which fund Social Security and Medicare, also apply.2Social Security Administration. What Are FICA and SECA Taxes?
- Social Security tax of 6.2% applies to earnings up to the 2026 wage base limit of $184,500. If your regular salary plus the bonus pushes your total earnings past that cap, the amount above it is exempt from Social Security tax.3Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates
- Medicare tax of 1.45% applies to every dollar of your bonus with no cap.3Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates
- An Additional Medicare Tax of 0.9% kicks in once total compensation exceeds $200,000 for single filers or $250,000 for married couples filing jointly. Your employer begins withholding this once your wages from that employer cross $200,000, and the filing-status thresholds are reconciled on your return.4Internal Revenue Service. Questions and Answers for the Additional Medicare Tax
Your employer matches the 6.2% and 1.45% on their side, but that match doesn’t come out of your pay.
Bonuses Over $1 Million
Once your cumulative supplemental wages from a single employer cross $1 million in a calendar year, the withholding rules change. Everything above the $1 million mark must be withheld at 37%, which matches the top individual income tax rate, and your W-4 can’t reduce it.1Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide – Section: 7. Supplemental Wages
The $1 million threshold is cumulative across the year and includes all supplemental wages, not just bonuses. If you received $800,000 in commissions earlier in the year and then get a $400,000 bonus, the first $200,000 of that bonus is withheld at 22% and the remaining $200,000 at 37%. The 22% and 37% rates were made permanent by the One, Big, Beautiful Bill (P.L. 119-21), which extended the individual rate structure originally enacted in the 2017 Tax Cuts and Jobs Act.5Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide
Non-Cash Bonuses, Prizes, and Gift Cards
A bonus doesn’t have to be cash to be taxable. A vacation package, electronics, event tickets, or a gift card are all treated as supplemental wages at fair market value, and the same 22% federal withholding framework applies.
Gift cards trip people up most. The IRS is explicit that cash and cash equivalents are never excludable from income, no matter how small. A gift card redeemable at a general retailer is a cash equivalent, so even a $25 Visa gift card from your employer is technically taxable income.6Internal Revenue Service. De Minimis Fringe Benefits
There is a narrow exception for “de minimis fringe benefits,” things small and infrequent enough that tracking them would be impractical. A holiday fruit basket or a company-branded mug can qualify. The IRS has ruled that items over $100 don’t qualify as de minimis, and gift cards to general retailers don’t qualify at any value.6Internal Revenue Service. De Minimis Fringe Benefits
Employers often handle the tax on a non-cash award by “grossing up” the payment, adding enough extra pay to cover the withholding. If they don’t, you’ll see a deduction on your pay stub for tax on a gift you never received in cash.
Which Tax Year the Bonus Belongs To
A bonus announced in December but paid in January raises a fair question: which year’s income is it? The answer turns on when you had access to the money, not when it was earned or announced.
Under the constructive receipt doctrine, income is taxable in the year it’s credited to your account or made available to you, even if you don’t actually withdraw it. A bonus deposited on December 31 is 2026 income, even if you don’t touch it until January.7eCFR. 26 CFR 1.451-2 – Constructive Receipt of Income
If the bonus is subject to genuine restrictions, like a vesting period or a requirement that you still be employed on a future date, it isn’t constructively received until those restrictions lapse. A bonus booked in December but not actually available until March is taxed in the year it becomes available.7eCFR. 26 CFR 1.451-2 – Constructive Receipt of Income
Ways to Reduce What You Owe on a Bonus
The 22% withholding is set at the payroll level, but you have levers to lower the actual tax you pay when you file.
Route the Bonus Into a 401(k)
Pre-tax retirement contributions reduce your taxable income dollar-for-dollar. For 2026, you can contribute up to $24,500 to a 401(k). Workers 50 and older get an additional $8,000 catch-up, bringing the limit to $32,500. Workers between 60 and 63 get a higher catch-up of $11,250, pushing the ceiling to $35,750.8Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
Many plans let you set a separate deferral rate for bonus payments. If your plan allows it, you can direct a large share of the bonus into your 401(k) before it hits your bank account. You have to adjust the election before the bonus is paid, and your total contributions for the year can’t exceed the annual limit.
Fund an HSA
If you’re enrolled in a high-deductible health plan, HSA contributions are another pre-tax option. The 2026 limit is $4,400 for self-only coverage and $8,750 for family coverage.9Internal Revenue Service. Notice 2025-19 – 2026 HSA Contribution Limits HSA contributions made through payroll avoid both income tax and FICA.
Adjust Your W-4
If you know a bonus is coming, you can submit a new W-4 to increase withholding from your regular paychecks before or after the bonus hits. That doesn’t change what you owe. It changes how much is prepaid, so you don’t face a surprise bill in April. Line 4(c) of the W-4 lets you request a specific additional dollar amount withheld each pay period. You can file another W-4 later to reset.
How Everything Reconciles on Your Tax Return
When you file Form 1040, your bonus, regular wages, investment income, and any other earnings collapse into one gross income figure. Deductions and credits bring you to taxable income, and the brackets determine what you owe.10Internal Revenue Service. About Form 1040, U.S. Individual Income Tax Return
The current federal income tax rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37%, with the bracket thresholds adjusted each year for inflation. If your taxable income puts you in the 12% bracket, the 22% withheld from your bonus was too much and the excess comes back as a refund. If you’re in the 32% bracket, the 22% fell short and you owe the difference. The withholding is a down payment; the return is the settlement.
Avoiding an Underpayment Penalty
A large bonus can create an underpayment problem if the withholding doesn’t cover your total liability. The IRS charges interest on underpayments at 7% annually as of early 2026.11Internal Revenue Service. Quarterly Interest Rates
You avoid the penalty if any of these apply:
- Your remaining balance after all withholding and credits is under $1,000.
- Total withholding and estimated payments cover at least 90% of the current year’s tax.
- Your payments this year equal or exceed 100% of the tax on last year’s return. For taxpayers with adjusted gross income above $150,000 ($75,000 if married filing separately), the threshold rises to 110%.12Internal Revenue Service. Underpayment of Estimated Tax by Individuals Penalty
For most people with steady jobs, the combination of bonus withholding and regular payroll withholding is enough to clear one of these safe harbors. The risk shows up when a bonus is a large share of annual income and the regular withholding was calibrated for a much lower bracket. In that situation, an estimated tax payment in the quarter the bonus lands can head off the penalty.
State Taxes on Bonuses
Federal withholding is only part of the picture. Most states with an income tax also require withholding on bonuses. Some apply a flat supplemental rate, others use the same aggregate calculation as regular wages, and a handful have no income tax at all. State supplemental withholding rates run from roughly 1.5% to nearly 12%. Check your state’s tax authority for the specific rate.