A retention bonus is taxed as supplemental wages: your employer withholds federal income tax at a flat 22%, plus Social Security and Medicare, before the money lands in your account. If you later have to repay it under a clawback, how you recover those taxes depends almost entirely on whether you repay in the same calendar year or a later one. The same-year path is clean. The later-year path costs you time, paperwork, and often cash.
Federal Withholding on the Bonus
The IRS treats a retention bonus as supplemental wages, separate from your regular paycheck. Employers have two options for calculating federal income tax withholding.
The common method is the flat rate: 22% of the bonus, regardless of your tax bracket or W-4. A $25,000 retention bonus produces $5,500 of federal income tax withholding right off the top.1Internal Revenue Service. 2026 Publication 15
One exception matters at the top end. If your total supplemental wages from a single employer cross $1 million in a calendar year, everything above that threshold is withheld at 37%, the highest marginal rate. The employer must apply this rate regardless of what your W-4 says.1Internal Revenue Service. 2026 Publication 15
The alternative is the aggregate method. The employer combines your bonus with your regular wages for the pay period and withholds as if the whole thing were one paycheck. That often produces a bigger withholding number, because the combined figure pushes the calculation into a higher bracket. You get the excess back at tax time, but your take-home from the bonus itself is smaller in the meantime.
Social Security, Medicare, and Additional Medicare Tax
FICA taxes come out on top of income tax withholding. Social Security is 6.2% of the bonus; Medicare is 1.45%.2Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates Your employer pays a matching share, but that doesn’t reduce your deduction.
Social Security tax stops at the annual wage base, which is $184,500 for 2026.3Social Security Administration. Contribution and Benefit Base If your regular salary already puts you past that ceiling before the bonus hits, no additional Social Security tax comes out of the bonus. Medicare has no wage cap, so it applies to every dollar.
Above $200,000 in wages for the calendar year, your employer must also start withholding a 0.9% Additional Medicare Tax, regardless of your filing status. The threshold for actually owing that tax on your return is different: $250,000 for married filing jointly, $200,000 for single filers, $125,000 for married filing separately. Any gap between what was withheld and what you actually owe gets reconciled when you file.2Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates
State Withholding
Most states with an income tax also withhold on supplemental wages. Some use a flat supplemental rate (roughly 0% to over 11%, depending on the state), and others simply add the bonus to your regular wages and withhold at your marginal rate. A few states have no income tax and take nothing. Between federal income tax, FICA, and state withholding combined, 35% to 45% of a retention bonus can come out before it reaches your bank account. Check your state’s specific rules.
How the Bonus Shows Up on Your W-2
Your employer will not break out the retention bonus on a separate line. The bonus amount is rolled into Box 1 (wages, tips, other compensation), Box 3 (Social Security wages), and Box 5 (Medicare wages and tips) alongside your regular salary.4Internal Revenue Service. 2026 General Instructions for Forms W-2 and W-3 You can’t reverse-engineer the bonus figure from the W-2 alone. Keep your bonus agreement and the pay stub showing the payment, because you’ll need those documents if you ever end up in a repayment situation.
Clawback Repayment Is on the Gross, Not the Net
Retention bonus agreements almost always include a clawback: leave before the retention period ends, or get terminated for cause, and the employer can demand the money back. The rules on how they can collect vary by state.
Here is the piece that catches people off guard. Most clawback provisions require repayment of the gross bonus, not the net you actually received. If your $30,000 bonus came in at $20,000 after withholding, you still owe $30,000. You’re fronting the government’s share and have to recover the taxes separately. Some agreements prorate the repayment based on how much of the retention period you completed. Read that language before you sign.
Recovering Taxes When You Repay in the Same Calendar Year
Same-year repayment is the clean case. The payment is treated as if it never happened. Your employer removes the bonus from your year-end W-2, so it doesn’t appear as income on your tax return at all. The employer can also recover the income tax and FICA withholding they originally took out, either by reducing withholding on your remaining paychecks or by refunding the overpayment directly. If you’ve already left the company, the employer should still return the excess withholding before year-end.
Recovering Taxes When You Repay in a Later Year
Once the calendar year closes, the W-2 for the year you received the bonus is locked in. The income stays on that prior-year return, and the taxes you paid on it don’t come back on their own. You have to recover them through your return for the year you made the repayment.
If the amount you repaid is more than $3,000, the “claim of right” doctrine gives you two options. Calculate both, because the better answer depends on your bracket in each year:5Internal Revenue Service. Publication 525, Taxable and Nontaxable Income
- Method 1 (Deduction): Claim the repaid amount as an itemized deduction on Schedule A for the repayment year. This reduces your taxable income for that year.
- Method 2 (Credit): Recalculate your tax for the original year as if the bonus had never been paid. The difference between what you actually paid and what you would have paid becomes a credit on your current-year return.
Your tax for the repayment year is the lesser of the two results. The credit method usually wins when you were in a higher bracket the year you received the bonus than the year you repaid it.6Office of the Law Revision Counsel. 26 USC 1341 – Computation of Tax Where Taxpayer Restores Substantial Amount Held Under Claim of Right
If the repayment is $3,000 or less, you’re largely out of luck. The miscellaneous itemized deduction that used to cover smaller repayments was eliminated for tax years after 2017, and there is currently no mechanism to recover income tax on a repayment at or below that threshold.5Internal Revenue Service. Publication 525, Taxable and Nontaxable Income
FICA Recovery Follows Its Own Path
The claim-of-right rules cover income tax only. Social Security and Medicare recovery runs on a separate track. Start by asking your former employer to refund the FICA overcollection. If they cooperate, they file a corrected return (Form 941-X) and issue you a corrected W-2 (Form W-2c) reducing your Social Security and Medicare wages. If the employer won’t cooperate, file Form 843 with the IRS to claim the refund yourself.5Internal Revenue Service. Publication 525, Taxable and Nontaxable Income
Additional Medicare Tax Requires an Amended Return
Additional Medicare Tax is computed on your personal return, not through employer withholding, so the employer can’t fix it. To recover any Additional Medicare Tax you overpaid, file Form 1040-X to amend the return for the year you originally received the bonus.5Internal Revenue Service. Publication 525, Taxable and Nontaxable Income