A bonus is extra pay on top of your regular wages, and how bonuses work comes down to three things: what kind of bonus you’ve been offered, how it’s taxed when it lands, and what conditions might let your employer take it back or refuse to pay it. The IRS treats every bonus as “supplemental wages,” so federal income tax withholding follows a special rule, and Social Security and Medicare come out on top of that. The check you take home is always noticeably smaller than the gross figure your employer announced.
What Counts as a Bonus
The word covers several different payments, and the type matters because the strings attached are different.
A signing bonus is an upfront payment to lure you in, often to offset equity or unvested benefits you’re leaving behind at another job. These commonly carry a repayment clause if you leave within a set period. A retention bonus does the opposite job, giving you a reason to stay through a merger, restructuring, or stretch when your skills are in demand.
Performance bonuses reward you for hitting a defined target: a sales number, a project deadline, a company revenue goal. Referral bonuses pay you for recommending a candidate who gets hired and stays. Holiday and spot bonuses are one-time payments with no set formula, usually handed out at year-end or to recognize a specific contribution.
How Your Bonus Amount Gets Set
Employers use a few standard structures. A flat-dollar bonus gives every eligible employee the same amount, whether that’s $1,000 or $5,000, regardless of salary. It’s simple and reads as fair for company-wide payouts.
A percentage-of-salary bonus ties the payment to your base pay, typically 5% to 20% depending on role and seniority. A manager earning $90,000 with a 10% target would receive $9,000 at full payout. The bonus scales with responsibility, but it also means senior staff receive much bigger checks for meeting the same relative benchmarks.
A bonus pool sets aside a fixed share of annual profits to be split across the workforce, with managers dividing the pool based on individual or team performance. Everyone’s payout rises and falls with how the company did overall.
Promised vs. Discretionary, and Why the Label Matters
Federal labor law splits bonuses into two categories, and the split has real consequences.
A discretionary bonus is one where the employer decides whether to pay it, and how much, entirely at their own discretion at or near the end of the period. No prior promise, no formula, no expectation it will happen again. A surprise year-end check or holiday gift card fits here.1eCFR. 29 CFR 778.211 – Discretionary Bonuses
A non-discretionary bonus is anything promised in advance. If your offer letter says you’ll earn a bonus for hitting a sales target, or your employer announces a production bonus to push output, it’s non-discretionary. The moment an employer commits to a formula or announces the payment ahead of time, the bonus becomes an earned part of your compensation.1eCFR. 29 CFR 778.211 – Discretionary Bonuses
Two things follow from this. First, if you’re a non-exempt employee entitled to overtime, non-discretionary bonuses must be rolled into your “regular rate of pay” before overtime premiums are calculated. Your employer can’t just pay you the bonus flat and leave your overtime rate alone.2eCFR. 29 CFR 778.209 – Method of Inclusion of Bonus in Regular Rate Second, calling a promised bonus “discretionary” to dodge that recalculation doesn’t hold up. What matters is whether the payment was announced, promised, or tied to a formula before you did the work.3Office of the Law Revision Counsel. 29 USC 207 – Maximum Hours
What Taxes Come Out of a Bonus
Bonuses get hit with two layers of federal tax: income tax withholding and payroll taxes for Social Security and Medicare. State income tax may apply on top.
Federal Income Tax Withholding
When your bonus is paid as a separate check, most employers use a flat 22% federal withholding rate. On a $10,000 bonus, $2,200 goes to the IRS before anything else comes out.4Internal Revenue Service. Publication 15 (2026), Employer’s Tax Guide
Your employer can also use the aggregate method, combining the bonus with your regular paycheck and withholding as if the whole amount were a single normal payment. This usually pulls more tax out, because the combined figure looks like a much higher salary when annualized. If a $5,000 bonus rides along with a $3,000 biweekly check, withholding runs as though you earn $8,000 every two weeks.4Internal Revenue Service. Publication 15 (2026), Employer’s Tax Guide
Withholding is only an estimate. When you file your return, you reconcile what was withheld against your actual liability. If 22% was too much for your income level, you get a refund; if it wasn’t enough, you owe.
Social Security and Medicare
Your employer also deducts 6.2% for Social Security on wages up to the 2026 wage base of $184,500 in combined earnings, and 1.45% for Medicare on the full bonus with no cap.4Internal Revenue Service. Publication 15 (2026), Employer’s Tax Guide5Social Security Administration. 2026 Cost-of-Living Adjustment (COLA) Fact Sheet
If your total wages for the year go above $200,000 (or $250,000 for joint filers), an additional 0.9% Medicare surtax kicks in on earnings past that threshold. A large bonus that pushes you over the line will trigger the extra withholding on the portion above it.6Internal Revenue Service. Questions and Answers for the Additional Medicare Tax
Put together: a $10,000 bonus for someone still under the Social Security wage base loses $2,200 to income tax at the flat rate, $620 to Social Security, and $145 to Medicare. That’s $2,965 in federal deductions, before any state tax. Take-home is roughly $7,035.
Using Your 401(k) to Shelter Some of It
If your employer’s plan allows it, you can route part or all of your bonus into your 401(k) and reduce the income tax hit. Many plans let you set a separate deferral rate for bonuses, so you might defer 6% of regular pay but 50% or 100% of a bonus.
The 2026 employee deferral limit is $24,500 across all 401(k) contributions for the year. Workers 50 and older can add $8,000 in catch-up contributions, and those aged 60 through 63 get an enhanced catch-up of $11,250 under SECURE 2.0.7Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026
Your total for the year across regular paychecks and bonus deferrals can’t cross those limits, so check your year-to-date contributions before adjusting. And deferrals only shield income tax. Social Security and Medicare still come out of the full bonus.
Vesting and Clawback: When You Might Have to Give It Back
Larger bonuses, especially signing and retention payments, often come with strings. A typical structure requires you to stay employed for one or two years to keep the full amount. Leave before the vesting date and you may forfeit the unvested portion or have to repay money already received.
Some employers structure signing bonuses as forgivable loans: you get the money upfront, and a slice of the “loan” is forgiven each month you stay. Leave early and you owe the unforgiven balance. This loan form tends to be more enforceable than a plain repayment clause.
In most states, an employer can’t simply subtract the clawback from your final paycheck without your written consent. Many state wage laws require the employer to sue you to recover the money rather than offset it against wages owed, and no deduction can push your pay below the federal minimum wage for hours worked.8U.S. Department of Labor. Fact Sheet 56C – Bonuses Under the Fair Labor Standards Act
Before you sign a bonus agreement, look for four things: what triggers repayment (voluntary quit, termination for cause, any separation), how long the clawback period runs, whether the amount is prorated for time served, and whether you’d owe the gross figure or only the net you actually received. The gross-vs-net point matters. If you received a $10,000 signing bonus and $3,000 went to taxes, a poorly drafted clause could still make you repay the full $10,000 out of pocket.
If You Earned a Bonus and Weren’t Paid
If you hit the criteria for a non-discretionary bonus and your employer refuses to pay, start with your paperwork. Review the employment contract, offer letter, and any written bonus plan. Look for language about when the bonus becomes “earned” and any disqualifying conditions, especially an “active employment on the payout date” requirement, which is a common trapdoor.
Then gather documentation: emails discussing the bonus, performance reviews confirming you hit targets, the original written terms, and pay stubs showing nothing was paid. That paper trail is the backbone of any claim.
If you can’t resolve it internally, you can file a complaint with the U.S. Department of Labor’s Wage and Hour Division at 1-866-487-9243. Many states have their own labor agencies handling wage claims, with their own filing deadlines. For substantial amounts, or if you suspect you were terminated specifically to avoid a bonus payout, an employment attorney is worth the consultation. Firing someone to duck earned compensation can violate public policy even in at-will states.
The line that decides everything is discretionary vs. non-discretionary. If the employer had full discretion, there’s no legal obligation. If the bonus was promised, announced in advance, or calculated by formula, it’s earned wages, and withholding it is a wage violation.1eCFR. 29 CFR 778.211 – Discretionary Bonuses