How bonuses are taxed comes down to one rule and one common misunderstanding: bonuses are treated as supplemental wages, and most employers withhold federal income tax on them at a flat 22%. Add Social Security and Medicare, and close to 30% can disappear before the money hits your account. But that 22% is a withholding estimate, not a special tax rate. Your bonus is ultimately taxed at whatever your marginal rate turns out to be when you file, and the difference gets refunded or billed then.
The Flat 22% Method
When your employer issues the bonus as a separate payment from your regular paycheck, payroll almost always uses what the IRS calls the percentage method. Federal income tax comes out at exactly 22%. Nothing else is allowed under this method, and your W-4 elections, filing status, and dependents don’t factor in.1Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide
The math is straightforward. Multiply the gross bonus by 0.22. A $10,000 bonus produces $2,200 in federal income tax withholding, before FICA is calculated on top. The 22% is a rough middle ground the IRS picked so lower earners aren’t massively overwithheld and higher earners aren’t massively underwithheld. Whether it lines up with your actual liability depends entirely on where the rest of your income lands.
The Aggregate Method
Some employers roll the bonus into your regular paycheck instead of cutting it separately. When that happens, payroll adds the bonus to your normal wages for that period, calculates withholding on the combined total as if you earned that inflated amount every pay period, then subtracts what would have been withheld from your regular wages alone. The remainder is the withholding on the bonus.1Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide
This method almost always pulls more than the flat 22%. Payroll software treats the combined check as your new normal and briefly projects you into a much higher annual income, which pushes withholding into higher brackets. If your check looks unusually thin, the aggregate method is a likely reason. The excess isn’t lost. It comes back at filing time, though your paycheck feels it in the meantime.
Social Security and Medicare Come Out Too
Federal income tax withholding is only part of the deduction. Your bonus is also subject to FICA: 6.2% for Social Security and 1.45% for Medicare.2IRS. Topic no. 751, Social Security and Medicare Withholding Rates Combined with the 22% flat rate, roughly 29.65% of the gross is gone before you see the deposit.
Social Security has a ceiling. For 2026, the 6.2% only applies to your first $184,500 of earnings from all sources.3Social Security Administration. Contribution and Benefit Base If your salary already crossed that cap before the bonus arrived, no more Social Security tax comes out. If you’re below it, only the portion of the bonus that brings you up to the cap gets hit.
Medicare has no ceiling. Every dollar of the bonus is subject to the 1.45% tax. Once your wages from a single employer exceed $200,000 in a calendar year, your employer must also withhold an additional 0.9% Medicare surtax, regardless of your filing status.4Internal Revenue Service. 2025 Instructions for Form 8959 – Additional Medicare Tax Your actual liability for that surtax depends on how you file: it kicks in at $250,000 for married filing jointly, $200,000 for single filers, and $125,000 for married filing separately.5Internal Revenue Service. Questions and Answers for the Additional Medicare Tax Any gap between what was withheld and what you actually owe gets reconciled on Form 8959 with your return.
Bonuses Above $1 Million
A different rule applies once your supplemental wages from a single employer cross $1 million in a calendar year. Every dollar above that threshold is subject to mandatory 37% withholding, which matches the top federal bracket for 2026.1Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide The first $1 million is still withheld under whichever method the employer normally uses. If your total income doesn’t actually reach the top bracket for the year, the 37% withholding on the excess is an overpayment you recover at filing time.
Non-Cash Bonuses and Gift Cards
A bonus doesn’t have to arrive as a check. Trips, electronics, prizes, and gift cards are treated the same way for tax purposes: if it has value, it’s taxable income, and your employer is required to include the fair market value on your W-2 as wages.6Internal Revenue Service. Publication 525, Taxable and Nontaxable Income A company-paid trip worth $5,000 is taxed like a $5,000 cash bonus.
Gift cards are the sharpest edge. Cash and cash equivalents are never excludable, no matter how small.7Internal Revenue Service. De Minimis Fringe Benefits A $25 gift card is technically taxable. If your employer hands you one and doesn’t add it to your W-2, the reporting responsibility falls on you.
State Tax Also Comes Out
Federal withholding isn’t the only layer. Most states impose their own income tax on bonuses, and many use a flat supplemental rate similar to the federal approach. Rates vary widely by state. Nine states have no income tax at all, so a bonus escapes state-level withholding there entirely. If you live in one state and work in another, the work state’s rules generally apply, with your home state often granting a credit to prevent double taxation. Your pay stub’s state withholding line will show what came out on top of the federal amount.
Why the 22% Isn’t Your Final Tax
Everything withheld from your bonus during the year is a prepayment. Your W-2 doesn’t break out supplemental wages separately. They’re rolled into total wages in Box 1.8Internal Revenue Service. About Form W-2, Wage and Tax Statement When you file, your actual tax is calculated on your total income against the progressive bracket structure, and every dollar withheld from every paycheck and bonus is applied against that number.
If your marginal bracket is 12%, the 22% flat rate overshot and you get a refund on the difference. If your marginal bracket is 32% or 35%, the 22% wasn’t enough and you owe. The bonus isn’t taxed at 22%. It’s taxed at whatever your rate turns out to be. The 22% is just the IRS’s default withholding guess.
Ways to Reduce the Tax on Your Bonus
The most direct way to shelter bonus income is to route it into a pre-tax retirement account. If your employer’s 401(k) plan treats bonuses as eligible compensation, raising your deferral percentage for the pay period the bonus hits pushes more of it out of federal income tax withholding.9Internal Revenue Service. 401(k) Plan Overview For 2026, the annual deferral limit is $24,500 under age 50, $32,500 at 50 or older, and $35,750 for those between 60 and 63.10Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500 Traditional 401(k) contributions still count as wages for Social Security and Medicare, so FICA still comes out.
A health savings account offers another option if you have a high-deductible health plan. For 2026, the contribution limits are $4,400 for self-only coverage and $8,750 for family coverage.11IRS.gov. Expanded Availability of Health Savings Accounts Under the One, Big, Beautiful Bill Act (OBBBA) HSA contributions made through payroll are excluded from both income tax and FICA, which makes them more tax-efficient than 401(k) deferrals dollar for dollar. Increasing your HSA contribution during a bonus pay period can meaningfully cut what’s withheld.
Avoiding an Underpayment Penalty
A large bonus can push your income high enough that the withholding doesn’t cover the extra liability. If that happens, an underpayment penalty is possible at filing time. The IRS waives it if you owe less than $1,000 when you file, or if your total payments during the year hit at least 90% of your current-year tax or 100% of your prior-year tax, whichever is smaller. If your adjusted gross income was above $150,000 the prior year, the 100% threshold rises to 110%.12Internal Revenue Service. Underpayment of Estimated Tax by Individuals Penalty
If a large bonus arrives late in the year and you suspect the withholding will fall short, you have two simple options. Make an estimated tax payment for the quarter through IRS Direct Pay or EFTPS, or file a new W-4 that temporarily raises your regular withholding for the remaining pay periods and switch it back once the gap is covered.