Are Bonuses Taxed Differently Than Salary?

Many people are surprised when their bonus paycheck is smaller than expected, leading to the belief that bonuses are taxed at a higher rate than regular salary. The difference, however, lies in how taxes are withheld from the payment, not the final tax rate you owe. The tax system treats all earned income the same on your annual return, but the methods for withholding tax on a bonus can differ from your standard paycheck.

Understanding Withholding vs. Final Tax Liability

Tax withholding is the amount of income tax an employer holds back from an employee’s paycheck and sends to the IRS on their behalf. It is an estimated prepayment toward your annual tax bill, intended to prevent a large payment when you file your return.

Your final tax liability is the total amount of tax you are legally obligated to pay for the entire year, calculated when you complete your annual tax return, such as Form 1040. On this form, all your income sources are added up, deductions and credits are applied, and the total amount withheld is subtracted to determine if you get a refund or owe more.

How Regular Salary is Taxed

For regular, recurring salary payments, the withholding process is designed to be steady. Employers use the information you provide on your Form W-4, Employee’s Withholding Certificate, to calculate how much tax to set aside from each paycheck. This form details your filing status, the number of dependents you claim, and any other adjustments for additional income or deductions.

Based on your W-4 inputs, your employer’s payroll system estimates your total annual tax liability and divides this amount evenly across the pay periods. The goal is to withhold an amount from each check that closely matches your actual tax obligation.

How Bonus Withholding is Calculated

The IRS considers bonuses “supplemental wages” and provides employers with different rules for withholding. Employers generally have two options for calculating the federal income tax withholding on a bonus.

The most common method, especially when a bonus is paid as a separate check, is the Percentage Method. Under this approach, the employer withholds a flat 22% from the bonus for federal income taxes. This rate applies to total supplemental wages up to $1 million within a calendar year, and a mandatory flat rate of 37% is applied to any bonus amount exceeding that threshold. For example, on a $5,000 bonus, an employer would withhold $1,100 for federal taxes.

The alternative is the Aggregate Method. An employer might use this if the bonus is included with your regular paycheck. Here, the bonus is added to your regular wages for that pay period, and the employer calculates the required withholding on the combined total. This temporarily inflates your income, pushing you into a higher withholding bracket for that single paycheck and resulting in a much larger amount of tax being withheld.

Reconciling Withholding on Your Tax Return

The higher withholding on a bonus is temporary. When you file your annual tax return, you reconcile all income and all tax payments. All of your earnings for the year—your regular salary, bonuses, and income from other sources—are added together to determine your total gross income.

Your final tax liability is then calculated based on the official marginal tax brackets for that year, which for 2025 are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The total amount of tax withheld during the year is credited against that final tax bill. Because the 22% flat rate used for many bonuses is often higher than an individual’s actual effective tax rate, this over-withholding frequently contributes to a larger tax refund.