Supplemental wages — bonuses, commissions, severance, and other pay outside your regular salary — are taxed the same as any other income at year-end, but your employer withholds from them differently. For 2026, the two allowed federal income tax withholding methods are a flat 22% on supplemental payments up to $1 million per year, or the aggregate method, which adds the payment to your regular wages and uses your W-4 to calculate withholding. Anything above $1 million in cumulative supplemental wages gets a mandatory 37% rate. The method your employer picks changes what hits your bank account on payday, not what you ultimately owe the IRS.
What Counts as Supplemental Wages
The IRS defines supplemental wages as wage payments that are not regular wages — payments that are irregular in timing or amount compared to your normal paycheck.1Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide – Section: 7. Supplemental Wages Common examples:
- Bonuses of any kind, including annual, performance, and signing bonuses
- Sales commissions
- Overtime pay, when paid separately from regular wages (employers can also choose to treat overtime as regular wages)
- Payouts for accumulated sick leave or vacation
- Severance pay
- Back pay or retroactive raises
- Cash or non-cash awards and prizes for performance, safety, or similar recognition
- Reported tips (employers may treat tips as regular wages instead)
- Taxable fringe benefits, non-accountable expense reimbursements, and nondeductible moving expense payments
The classification matters because it determines which withholding method applies. If an employer lumps a bonus into a regular paycheck without separating the amounts, the entire payment gets withheld as if it were all regular wages, which usually means heavier withholding than necessary on the bonus portion.
The Two Federal Withholding Methods
When an employer separately identifies supplemental wages from regular wages and has withheld income tax from your regular pay in the current or immediately preceding calendar year, the employer can pick either method.1Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide – Section: 7. Supplemental Wages
Flat 22% Method
The employer withholds exactly 22% of the supplemental payment for federal income tax, regardless of your filing status or W-4 elections.1Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide – Section: 7. Supplemental Wages No other percentage is allowed. This method is available only when the employer has separated supplemental wages from regular wages in its records and your cumulative supplemental wages for the year stay at or below $1 million. Most employers cutting standalone bonus checks use this method because the math is one multiplication.
Aggregate Method
The aggregate method treats the supplemental payment as if it were part of your regular wages for that pay period. The employer adds the bonus or commission to your regular wages for the period, calculates federal income tax withholding on the combined total using your W-4 and the standard IRS withholding tables, then subtracts the tax already withheld (or to be withheld) on the regular wages alone. The difference is what gets held back from the supplemental portion.1Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide – Section: 7. Supplemental Wages
This takes more work but often produces withholding closer to your real tax liability, especially if you are in a bracket below 22%. It is also the required method when supplemental wages are combined with regular wages in a single payment and the employer does not specify the amount of each, and when the employer did not withhold income tax from your regular wages in either the current or the immediately preceding calendar year.1Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide – Section: 7. Supplemental Wages
The $1 Million Threshold
Once your cumulative supplemental wages from a single employer (or a group of employers under common control) exceed $1 million in a calendar year, a mandatory 37% withholding rate applies to every dollar above that threshold.1Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide – Section: 7. Supplemental Wages That matches the top federal individual income tax bracket for 2026.2Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026, Including Amendments From the One, Big, Beautiful Bill The employer applies this rate without regard to your W-4.
If you have received $900,000 in supplemental wages and then get a $200,000 bonus, the first $100,000 of that bonus can still be withheld at 22%, and the remaining $100,000 gets withheld at 37%. The 22% and 37% rates were made permanent by P.L. 119-21.
Social Security, Medicare, and the Extra 0.9%
Federal income tax is only part of the story. Supplemental wages are also subject to Social Security and Medicare taxes at the same rates as regular wages.3Internal Revenue Service. Publication 15-A (2026), Employer’s Supplemental Tax Guide
- Social Security tax: 6.2% withheld from you on wages up to the 2026 wage base of $184,500. Once your combined regular and supplemental wages hit that cap, no more Social Security tax is withheld for the rest of the year.4Social Security Administration. 2026 Cost-of-Living Adjustment (COLA) Fact Sheet
- Medicare tax: 1.45% withheld with no wage cap.
- Additional Medicare Tax: an extra 0.9% on wages above $200,000 in a calendar year. Your employer must start withholding this once your wages cross the threshold, regardless of your filing status or whether another employer also pays you.5Internal Revenue Service. Questions and Answers for the Additional Medicare Tax
A large bonus can push you past the Social Security wage base or the $200,000 Additional Medicare Tax threshold mid-year. When that happens, the composition of your subsequent paychecks shifts in a way that often catches people by surprise.
Why Withholding Does Not Equal Your Actual Tax
This is where most of the confusion lives. The 22% flat rate is a withholding convenience, not a tax rate. Your bonus income is ultimately taxed at whatever marginal rate applies to your total income for the year, which may be higher or lower than 22%.
For 2026, the federal income tax brackets for single filers are:2Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026, Including Amendments From the One, Big, Beautiful Bill
- 10% on income up to $12,400
- 12% from $12,401 to $50,400
- 22% from $50,401 to $105,700
- 24% from $105,701 to $201,775
- 32% from $201,776 to $256,225
- 35% from $256,226 to $640,600
- 37% over $640,600
Say your salary already puts you in the 32% bracket and you receive a $15,000 bonus withheld at 22%. Your employer held back $3,300, but the actual federal tax on that bonus is closer to $4,800. You will owe the $1,500 difference at filing time unless other withholding or credits make up the gap. A worker in the 12% bracket, meanwhile, had too much withheld on the same bonus and will get the excess back as a refund.
At the W-2 stage this all evens out. Supplemental wages are combined with regular wages in Box 1, and the federal income tax withheld on both appears together in Box 2. You do not separately calculate or report which part of your income was supplemental; the distinction only matters for how withholding happens during the year.
What to Do if Too Little Was Withheld
If you know your marginal rate is well above 22% and a bonus is coming, you have two main options. You can file an updated W-4 with your employer to increase withholding on your remaining regular paychecks, or you can make an estimated tax payment directly to the IRS. Either approach can help you avoid an underpayment penalty when you file.
Steering Bonus Pay Into Your 401(k)
Many 401(k) plans let you defer a percentage of bonus or commission income into the plan, which reduces the taxable amount of that payment. Whether yours does depends on the plan document; some plans apply your elected deferral percentage to all compensation, and others exclude certain pay types. Check with your plan administrator if you are not sure.
The 2026 401(k) elective deferral limit is $24,500.6Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500 If you have already contributed close to that cap through regular payroll deferrals, a large year-end bonus may push you over unless your payroll system automatically stops contributions at the limit. Some employees deliberately keep their regular deferral rate low early in the year so they can route a bigger share of a year-end bonus into the plan.
State and Local Withholding Varies
Federal rules are only half the picture. State treatment of supplemental wages varies widely. Many states allow a flat withholding rate on supplemental payments, with rates ranging from roughly 1.5% to over 11%. Others require the aggregate method. A few states have no income tax at all. Local jurisdictions sometimes add their own withholding rules on top. If your bonus withholding looks different from a coworker’s in another state, that patchwork is almost always the reason.