Does Gross Pay Include a Bonus? How It Affects Your Paycheck

Gross pay stands as the initial figure representing an individual’s total earnings before any deductions are applied. Grasping its components, particularly how additional compensation like bonuses integrates into this figure, is a necessary step for effective financial planning and understanding one’s true earning potential.

Defining Gross Pay

Gross pay represents the total amount of compensation an employee earns from their employer before any taxes, benefits, or other deductions are withheld. This is the figure typically quoted when discussing annual salaries or hourly wages. It serves as the baseline for calculating an employee’s overall compensation and subsequent tax obligations.

Gross pay includes regular wages, whether paid hourly or as a fixed salary. Overtime pay, earned for hours worked beyond the standard workweek. Additionally, commissions from sales, reported tips, and certain taxable reimbursements for business expenses are all included in this pre-deduction total.

Bonuses and Gross Pay Calculation

Bonuses are supplemental wages included in an employee’s gross pay. Regardless of their purpose, such as performance-based incentives, sign-on bonuses, retention awards, or holiday gifts, these payments are added to an employee’s regular earnings. For example, if an employee earns a regular salary and also receives an annual performance bonus, both amounts combine to form their total gross pay before any deductions are applied.

Impact on Deductions and Take-Home Pay

The inclusion of bonuses in gross pay means they are subject to the same types of deductions as regular wages. These deductions encompass federal income tax withholding, as well as applicable state and local income tax withholdings. Federal Insurance Contributions Act (FICA) taxes, which fund Social Security and Medicare, are also withheld from bonuses.

For 2025, the Social Security tax rate is 6.2% on earnings up to a wage base limit of $176,100, while the Medicare tax rate is 1.45% on all wages, with no wage base limit. An additional Medicare tax of 0.9% applies to wages exceeding $200,000 in a calendar year.

Beyond taxes, other deductions also reduce the total. These include pre-tax deductions like 401(k) contributions and health insurance premiums, as well as post-tax deductions such as union dues.

While bonuses are part of gross pay, their withholding can differ from regular wages due to specific IRS rules for supplemental wages. Employers typically use one of two methods for federal income tax withholding on bonuses: the percentage method or the aggregate method.

Under the percentage method, a flat 22% federal income tax is often withheld from supplemental wages up to $1 million. If supplemental wages paid to an employee exceed $1 million in a calendar year, the amount above $1 million is subject to a mandatory 37% federal income tax withholding rate. Alternatively, the aggregate method involves combining the bonus with regular wages for a pay period and calculating withholding on the total amount as if it were a single payment. Although significant amounts may be withheld from a bonus check, this is a withholding estimate; the actual tax liability is determined when the annual tax return is filed.