Tax on Bonus Pay: Rates, Withholding Methods, and How to Reduce It

Tax on bonus pay works the same as tax on any other ordinary income when you file your return, but the withholding rules are different, which is why the deposit looks smaller than you expected. Most employers withhold a flat 22% for federal income tax on bonuses, and Social Security, Medicare, and state taxes come out on top of that. If the withholding overshoots your actual tax rate, the difference comes back as a refund.

Why Your Bonus Check Looks So Small

The IRS classifies bonuses as “supplemental wages,” a category for pay outside your normal salary or hourly rate. Because supplemental wages are irregular, payroll systems can’t use the same withholding tables applied to your steady paycheck. Employers instead follow one of two special methods, and both tend to overestimate the tax you actually owe. Layer FICA and state tax on top, and a $5,000 bonus can shrink to $3,500 or less before it lands in your account.

The heavy withholding is a prepayment, not a final tax bill. Bonus dollars are taxed at the same marginal rates as every other dollar of income when you file. For 2026, those rates run from 10% to 37% depending on total taxable income. A single filer earning $80,000 sits in the 22% bracket on their top dollars, so flat 22% withholding lands close to accurate. Someone earning $45,000 is mostly in the 12% bracket, so 22% overpays and the excess comes back at tax time.

The Flat 22% Method

When a bonus goes out as a separate payment from your regular paycheck, most employers withhold a flat 22% for federal income tax. This method ignores your W-4 elections, filing status, and dependents. The employer takes 22% off the top and sends it to the Treasury.¹

Payroll departments favor it because it requires almost no calculation. It works reasonably well for employees in the 22% or 24% brackets, overwithholds for lower earners, and underwithholds for higher earners. The mismatch gets corrected on your return.

If your supplemental wages from one employer top $1 million in a calendar year, every dollar above that threshold must be withheld at 37%, the top federal income tax rate. This higher rate was made permanent under P.L. 119-21.¹

The Aggregate Method

Some employers fold the bonus into the same paycheck as your regular wages. When that happens, the payroll system uses what the IRS calls the aggregate method, which almost always withholds more than the flat 22% approach.

Here’s why. The system adds the bonus to your regular pay for that period, then calculates federal tax as if you earned the combined amount every pay period for the whole year. A one-time bonus temporarily pushes your paycheck into a much higher annualized bracket, so the effective withholding on the bonus portion can land at 30% or more for a mid-range earner.¹

This is where most of the “they taxed my bonus at 40%” complaints originate. The money isn’t gone permanently. It comes back as a larger refund or a smaller balance due when you file. But if you were counting on the full amount for a purchase, the timing matters.

Social Security, Medicare, and State Tax

Federal income tax withholding is only part of what comes out. Two additional federal taxes apply to every bonus dollar:

Social Security at 6.2% of the gross bonus, up to the annual wage base of $184,500 in 2026. Once your cumulative earnings for the year hit that ceiling, no more Social Security tax is withheld from any pay, including bonuses.²³
Medicare at 1.45% of the full bonus, with no wage cap. If your total wages for the year exceed $200,000 (single) or $250,000 (married filing jointly), an additional 0.9% Medicare tax applies to earnings above those thresholds.²⁴

Most states also tax bonus income. Some apply a flat supplemental rate similar to the federal 22%, others require an aggregate calculation, and a few have no state income tax at all. The combined federal, FICA, and state withholding can easily total 35% to 45% of a bonus, depending on where you live and how much you earn.

What Else Counts as a Bonus

The 22% flat rate and aggregate method aren’t limited to year-end bonuses. The IRS defines supplemental wages broadly to include commissions, overtime pay, severance, awards and prizes, back pay, reported tips, retroactive pay increases, accumulated sick leave payouts, taxable fringe benefits, and expense reimbursements paid under a nonaccountable plan.¹

Signing bonuses and retention bonuses fall into this category. So do restricted stock units when they vest. The fair market value of the shares on the vesting date counts as supplemental wages, and employers typically withhold at 22% by selling a portion of the shares. For higher earners in tech and finance, RSU vesting can trigger significant underwithholding because 22% sits well below their actual marginal rate.

Ways to Soften the Hit

Defer Into Your 401(k)

If your employer’s plan treats bonuses as eligible compensation, you can elect to defer some or all of the payment into a traditional 401(k). Every pre-tax dollar you contribute avoids federal income tax withholding for now. Some plans allow a separate deferral rate for supplemental payments, so you could push 80% of a bonus into the plan while keeping your regular salary contribution at 10%.

There are catches. Whether bonuses count as eligible compensation depends on your employer’s plan document, not federal law, and some plans exclude them entirely. Total employee contributions across all pay types can’t exceed $23,500 in 2026 if you’re under 50 ($31,000 if you’re 50 to 59, or $34,750 if you’re 60 to 63). If you’ve been contributing steadily from regular checks, you may not have much room left. Deferring a bonus into a 401(k) also doesn’t reduce your total annual tax compared to deferring the same amount from regular pay. It just shifts which dollars go into the account.

Adjust Your W-4

If you know a bonus is coming and expect the withholding to overshoot your actual rate, submit a new W-4 to your employer beforehand. Step 4(c) of the form lets you request additional withholding per pay period, and you can use it in reverse by zeroing out any extra withholding you previously elected to offset some of the bonus hit. After the bonus paycheck clears, submit another W-4 to return to your normal settings.⁵

This takes confidence in your tax math. Reduce withholding too aggressively and you could end the year underpaid and face a penalty. The IRS Tax Withholding Estimator at irs.gov/W4App can help you run the numbers first.

Reconciling at Tax Time

When you file Form 1040, the IRS doesn’t distinguish between salary dollars and bonus dollars. It adds everything together, applies the standard or itemized deduction, and calculates tax using the same bracket schedule that applies to all ordinary income. The total federal tax withheld during the year, including the 22% from your bonus, is compared to that final number.

If the flat 22% or the aggregate method overpaid relative to your bracket, the excess comes back as part of your refund. If your marginal rate exceeds 22%, you may owe additional tax in April. Neither outcome means your bonus was taxed at the “wrong” rate. The withholding was an estimate, and estimates get trued up on the return.

Avoiding an Underpayment Penalty

A large bonus late in the year can leave you underpaid if the extra income pushes your total tax well above what was withheld. The IRS charges a penalty when you haven’t paid enough during the year, but you’re safe if you meet either of two thresholds: total payments (withholding plus estimated tax) equal at least 90% of your current-year tax, or at least 100% of last year’s tax. If your adjusted gross income last year exceeded $150,000, that second threshold rises to 110%.⁶

If a late-year bonus creates that risk, the annualized income installment method on Form 2210 can help. This calculation accounts for the fact that your income wasn’t earned evenly across the year and can reduce or eliminate a penalty by matching required payments to when the income actually arrived.⁷

If You Have to Repay a Bonus

Clawback provisions sometimes require you to return a bonus if you leave the company within a certain period or if performance targets are later revised. How this affects your taxes depends on timing.

If you repay in the same calendar year you received the bonus, your employer can amend its payroll filings, reduce your reported wages, and refund the payroll taxes withheld on the original payment. In that case, you only repay the net amount, not the gross. Employers aren’t legally required to do this. If yours doesn’t adjust its payroll records, you can deduct the repayment on your own return for that year.

Repaying in a later year is more complicated. If you return more than $3,000, IRC Section 1341 gives you two options, and you use whichever produces a lower tax bill. Under the first, you take a deduction for the repayment in the year you repay it. Under the second, you recalculate your taxes for the original year as if you had never received the bonus, and the resulting decrease becomes a credit on your current-year return.⁸

For repayments of $3,000 or less, Section 1341 doesn’t apply. You deduct the repaid amount on the same form or schedule where the income was originally reported. IRS Publication 525 walks through the exact calculation for both scenarios.

1
Internal Revenue Service. Publication 15, Employers Tax Guide – Section: Supplemental Wages
2
Office of the Law Revision Counsel. 26 USC 3101 – Rate of Tax
3
Social Security Administration. Contribution and Benefit Base
4
Internal Revenue Service. Questions and Answers for the Additional Medicare Tax
5
Internal Revenue Service. Form W-4, Employees Withholding Certificate
6
Office of the Law Revision Counsel. 26 USC 6654 – Failure by Individual to Pay Estimated Income Tax
7
Internal Revenue Service. Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts
8
Office of the Law Revision Counsel. 26 USC 1341 – Computation of Tax Where Taxpayer Restores Substantial Amount Held Under Claim of Right