Do Gross Wages Include Bonuses? And How They’re Taxed

A common question arises regarding whether bonuses are included in gross wages and how they are taxed. Bonuses are part of your gross wages, which are your total earnings before deductions. Grasping the distinction between gross and net pay, especially when bonuses are involved, helps individuals better comprehend their financial picture and tax obligations.

Defining Gross Wages

Gross wages represent the total money an employee earns from their employer before any taxes, benefits, or other deductions are withheld. They encompass regular hourly pay, salaries, overtime pay, and commissions. Gross wages also include other compensation like reported tips, retroactive pay increases, and the value of certain fringe benefits. Bonuses and incentives are also part of gross wages, contributing to this total.

How Bonuses are Taxed

While bonuses are part of gross wages, their federal income tax withholding can sometimes differ from regular pay. The Internal Revenue Service (IRS) classifies bonuses as “supplemental wages,” which are subject to specific withholding rules. Employers typically have two primary methods for withholding federal income tax from supplemental wages.

One common method is the percentage method, also known as the flat rate method. If supplemental wages like bonuses are paid separately from regular wages, employers withhold federal income tax at a flat rate of 22% for amounts up to $1 million within a calendar year. For any portion exceeding $1 million, a higher flat rate of 37% applies.

The alternative is the aggregate method, used when supplemental wages are combined with regular wages in a single payment. The employer adds the bonus amount to the employee’s regular wages for that pay period. The total combined amount is then used to calculate federal income tax withholding based on the employee’s Form W-4 and standard IRS withholding tables. While federal rules dictate these methods, state and local tax rules may also apply to bonuses, varying by jurisdiction.

Gross vs. Net Pay and Your W-2

Understanding the difference between gross and net pay is essential. Gross pay is the total earnings before any deductions, while net pay is the “take-home pay” an employee receives after all deductions have been subtracted.

Common mandatory deductions from gross pay include federal income tax withholding, state income tax withholding (where applicable), and Federal Insurance Contributions Act (FICA) taxes. FICA taxes comprise Social Security tax, typically 6.2% of wages up to an annual limit ($176,100 for 2025), and Medicare tax, which is 1.45% of all wages with no income limit. Voluntary deductions can include contributions to retirement plans like a 401(k), health insurance premiums, and flexible spending accounts.

All gross wages earned throughout the year, including any bonuses received, are reported on your Form W-2, Wage and Tax Statement. Your total taxable wages for federal income tax purposes are listed in Box 1 of your W-2, which combines your regular wages, bonuses, and other taxable compensation. This Box 1 figure is typically lower than your total gross earnings because it accounts for certain pre-tax deductions, such as health insurance premiums and retirement contributions.