Do Bonuses Get Taxed Differently From Your Salary?

When you receive a bonus, the net amount deposited into your bank account can seem smaller than the gross amount awarded. This discrepancy leads many to question if bonuses are taxed more heavily than regular paychecks. The idea that a special, higher tax rate applies to bonus income is a common misunderstanding. The difference stems from the way money is withheld from the payment, not from a different set of tax rules.

The Taxation of Bonus Income

Bonuses are not taxed at a different or higher rate than your regular salary. The Internal Revenue Service (IRS) views bonus payments as “supplemental wages,” a category that also includes commissions, overtime, and severance pay. These supplemental wages are combined with your regular earnings to determine your total annual income, and your final tax bill is calculated on this total figure.

The distinction lies not in the final tax rate but in the amount of money withheld when the bonus is paid. The initial withholding from a bonus check can be higher than from a regular paycheck, which creates the impression of a “bonus tax.” This withholding process is a prepayment of the taxes you will eventually owe, and it is reconciled when you file your annual tax return.

Federal Withholding Methods for Bonuses

The feeling that bonuses face a higher tax is due to the specific withholding methods the IRS permits for supplemental wages. These methods can result in a larger initial deduction compared to a typical salary payment. Employers choose between two primary approaches for federal withholding.

One approach is the Percentage Method. If the bonus is paid separately from regular wages, an employer can withhold a flat 22% for federal taxes on supplemental income up to $1 million for the year. For example, on a $5,000 bonus, your employer would withhold $1,100 for federal taxes. For bonus amounts exceeding the $1 million threshold in a year, the withholding rate increases to 37%.

The alternative is the Aggregate Method. Employers use this method when they combine the bonus with an employee’s regular wages into a single paycheck. The withholding is then calculated on the total amount based on the employee’s Form W-4. This can push the income for that pay period into a higher marginal tax bracket for withholding purposes, leading to a larger tax deduction. The Percentage Method is a frequent choice for standalone bonus checks, while the Aggregate Method is more common for recurring payments like commissions.

State Tax Withholding on Bonuses

In addition to federal income tax, bonuses are also subject to state and local income taxes. States require employers to withhold a portion of bonus payments to cover these tax liabilities, which further reduces the net amount.

States have their own distinct regulations for withholding on supplemental wages, which do not always mirror the federal system. Many states adopt approaches similar to the IRS, offering employers the option to use either a flat percentage rate specific to that state or an aggregate method. The flat percentage rates vary significantly from one jurisdiction to another.

Because these rules are determined at the state level, the exact impact on your bonus check depends on where you are employed. To understand the specific withholding rules that apply, you would need to consult the guidance provided by your state’s department of revenue.

Reconciling Withholding on Your Tax Return

The tax withholding process is reconciled when you file your annual tax return. The Form W-2 you receive from your employer by January 31st summarizes your total earnings and withholdings for the year. It shows your combined salary and bonus as a single figure for total wages, along with the total federal and state taxes withheld.

Using this W-2, you will complete your Form 1040 to calculate your actual tax liability for the year. This calculation is based on your total income, filing status, and any deductions or credits you are eligible for.

This is the point where the high withholding from your bonus is reconciled. You compare your actual tax liability with the total amount of tax withheld from all your paychecks. If the total amount withheld exceeds what you actually owe, you will receive a tax refund. If not enough was withheld, you will have a balance due to the IRS.