Your bonus isn’t actually taxed at 40 percent, even though your pay stub can make it look that way. Federal law lets employers withhold a flat 22% for income tax on most bonus payments, and once Social Security, Medicare, and state and local taxes pile on top, the total withheld often lands somewhere between 35% and 42%. Withholding is a prepayment, not the final tax. When you file your return, some of it may come back.
Why Bonuses Get Withheld Differently
The IRS treats bonuses as “supplemental wages,” a category that also covers commissions, overtime, severance, back pay, and awards. Regular wages run through withholding tables tied to your W-4 and pay frequency. Supplemental wages get a shortcut: when a bonus is paid separately (or paid with regular wages but identified separately), the employer can apply a flat 22% federal income tax withholding rate instead of recalculating your projected annual income for a one-off payment.1Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide
That 22% is fixed. Employers using this method cannot pick a lower or higher percentage.
FICA Adds Another 7.65%
Every bonus dollar is also subject to FICA. Social Security withholds 6.2% and Medicare withholds 1.45%, for a combined 7.65% that applies whether the money is regular pay or a bonus.2Social Security Administration. 2026 Cost-of-Living Adjustment (COLA) Fact Sheet Nothing on your W-4 changes this.
Higher earners get one break. Social Security tax only applies to wages up to $184,500 in 2026.2Social Security Administration. 2026 Cost-of-Living Adjustment (COLA) Fact Sheet If your regular salary already pushed you past that line before the bonus arrived, the 6.2% falls off, saving you $62 per $1,000 of bonus. Medicare has no wage cap, so the 1.45% always applies.
If your total wages for the year go above $200,000, your employer must withhold an extra 0.9% Additional Medicare Tax on earnings above that line.3Internal Revenue Service. Questions and Answers for the Additional Medicare Tax A large bonus can be the payment that trips the threshold. The withholding trigger is $200,000 regardless of filing status, but the actual liability threshold is $250,000 for married couples filing jointly, so joint filers below that combined income can recover the excess at filing time.
State and Local Taxes: The Biggest Variable
Most states with an income tax also withhold on supplemental wages, often at their own flat rates. Those rates run from under 2% in some states to more than 10% in others. Nine states impose no income tax at all, so workers there skip this layer entirely.
Some cities add a further local income tax. Individually these are usually modest, but they stack on top of everything else. Where you live is what mostly determines whether your total withholding on a bonus lands closer to 32% or closer to 42%.
Where the “40%” Comes From
Here is how the layers stack on a $10,000 bonus for someone who hasn’t exceeded the Social Security wage base:
- Federal income tax withholding at 22%: $2,200
- Social Security at 6.2%: $620
- Medicare at 1.45%: $145
- State income tax, assume 5%: $500
- Local tax, where it applies: often 1% to 3%
Federal plus FICA plus a middle-of-the-road 5% state tax already puts you at 34.65%. Add a 2% city tax and you’re at 36.65%. In higher-tax states the combined withholding pushes past 40% without much effort. It isn’t one 40% tax. It’s several taxes hitting the same payment at once.
When the Aggregate Method Makes It Look Worse
The flat 22% is one option. The other is the aggregate method, and the employer chooses which to use. Employees can ask, but they have no legal right to dictate the method.4Federal Register. Flat Rate Supplemental Wage Withholding Under the aggregate method, the employer combines the bonus with your regular paycheck and runs the total through standard withholding tables as if that inflated amount were your normal pay.5eCFR. 26 CFR 31.3402(g)-1 – Supplemental Wage Payments
This is where truly shocking withholding shows up. A $4,000 biweekly paycheck combined with a $10,000 bonus gets treated as if you earn $14,000 every two weeks, or roughly $364,000 annualized, and the tables withhold at rates matching that salary. The excess gets reconciled on your return, but the immediate hit stings. If this happens to you, it’s worth asking payroll whether future bonuses can use the flat percentage method.
Bonuses Above $1 Million
A separate rule applies once your total supplemental wages for the calendar year cross $1 million. Every dollar above that threshold is withheld at 37%, the top marginal federal income tax rate, regardless of what your W-4 says.1Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide The first $1 million still gets the 22% flat rate. This mostly matters for executives, big commission earners, and anyone hitting the line unexpectedly through a mix of bonus, severance, and stock income in the same year.
Withholding Isn’t Your Final Tax Bill
This is the part most people miss. Withholding is a deposit, not the tax. When you file, the IRS doesn’t care how your income arrived. It all lands in one pot, and your actual liability depends on total income, filing status, deductions, and credits.6Internal Revenue Service. Instructions for Form 1040 (2025) Everything withheld during the year counts as a credit against that liability.
For a lot of workers, the flat 22% is more than needed. In 2026, single filers with taxable income up to $12,400 sit in the 10% bracket, and income between $12,401 and $50,400 falls in the 12% bracket. The next bracket up is 22%, which runs to $105,700 for single filers and $211,400 for married couples filing jointly.7Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026, Including Amendments From the One, Big, Beautiful Bill If your taxable income sits in the 10% or 12% bracket, that 22% withheld on the bonus was too much, and the difference comes back as a refund. If you’re in the 24% or higher brackets, 22% wasn’t enough and you may owe a little more in April.
How to Keep More of Your Bonus
You can’t dodge the taxes, but you can shelter some of the income or reduce what gets withheld. The moves need to happen before the bonus lands.
Boost Your 401(k) for That Pay Period
If your plan allows mid-year changes, raising your 401(k) deferral percentage for the paycheck that includes the bonus is usually the most effective move. For 2026, you can defer up to $24,500, with an $8,000 catch-up at age 50 and up, or $11,250 for ages 60 through 63.8Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500 Pre-tax contributions reduce federal and state income tax withholding on the bonus, though FICA still applies to the full amount.
Fund an HSA
If you’re enrolled in a high-deductible health plan, an HSA offers a similar shelter. For 2026 the contribution limits are $4,400 for self-only coverage and $8,750 for family coverage, plus $1,000 more if you’re 55 or older.9Internal Revenue Service. Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans Payroll HSA contributions under a cafeteria plan skip both income tax and FICA, making them slightly more efficient than 401(k) contributions dollar-for-dollar.
Adjust Your W-4
If your regular paycheck withholding already covers your projected tax bill, you can file a revised W-4 to reduce withholding on later paychecks and offset the over-withholding from the bonus. The IRS withholding estimator at irs.gov/W4App is built for this.10Internal Revenue Service. Form W-4 (2026) Employee’s Withholding Certificate Cut withholding too far and you can trigger an underpayment penalty if you end up owing more than $1,000 without hitting the safe harbor.11Internal Revenue Service. Underpayment of Estimated Tax by Individuals Penalty
Non-Cash Bonuses and Timing
Bonuses don’t have to arrive as cash to be taxed. Trips, electronics, gift cards, and other employer prizes are taxable at fair market value.12Office of the Law Revision Counsel. 26 USC 74 – Prizes and Awards The value gets added to your W-2, and the withholding on it typically comes out of your regular paycheck, which can make one pay period look unusually thin even though no cash bonus was deposited.
Timing matters too. A bonus is taxable in the year you actually receive it or have access to it, not necessarily the year it was earned. A bonus announced in December but paid in January belongs to the next tax year.13eCFR. 26 CFR 1.451-2 – Constructive Receipt of Income If you have any say in when the payment lands, run the numbers for both years before asking to move it.