How Are Bonuses Taxed in Massachusetts?

Receiving a bonus is a positive event, but it’s accompanied by tax implications. A bonus is considered supplemental income, which means it is subject to taxation just like your regular salary. This income is liable for federal taxes, state taxes in Massachusetts, and federal payroll taxes known as FICA. The amount you see on your bonus check is the net result after these tax obligations have been accounted for by your employer.

Federal Tax Withholding on Bonuses

The Internal Revenue Service (IRS) categorizes bonuses as “supplemental wages,” which allows employers to use one of two methods for federal income tax withholding. A widely used approach is the percentage method, where the employer withholds a flat 22% from the bonus amount for federal income tax. This method is often applied when the bonus is paid separately from your regular paycheck. For supplemental wages exceeding $1 million in a calendar year, any amount over the $1 million threshold is subject to a higher 37% withholding rate.

Alternatively, an employer can use the aggregate method. This involves combining the bonus with the employee’s regular wages for the current pay period and calculating the federal income tax withholding on the total amount as if it were a single payment. The calculation is based on the information provided on your Form W-4.

Beyond income tax, bonuses are also subject to FICA taxes, which fund Social Security and Medicare. The Social Security tax is 6.2% on wages up to an annual limit, which for 2025 is projected to be $176,100. The Medicare tax is 1.45% of all wages, with no income limit.

Massachusetts State Tax on Bonuses

In Massachusetts, the taxation of bonuses is more direct than the federal system. The state has a flat personal income tax rate, which simplifies the withholding calculation for supplemental wages. Your employer will typically withhold state income tax from your bonus at this flat rate.

A significant consideration in Massachusetts is the 4% surtax on annual taxable income that exceeds a specific threshold. For tax year 2025, this threshold is $1,083,150. To account for this, state withholding rules for supplemental wages, detailed in the state’s Circular M, require a different calculation if an employee’s total wages are expected to surpass this threshold. In such cases, the withholding on the bonus may be a combination of the standard 5% rate and a higher 9% rate on the portion of income likely to be subject to the surtax.

Reconciling Withholding with Annual Tax Liability

A common point of confusion is the belief that bonuses are taxed at a higher rate than regular pay. This perception arises because the withholding rate, especially the 22% federal flat rate, can be higher than an employee’s effective tax rate. However, withholding is merely a prepayment of taxes. The final tax liability is determined when you file your annual tax returns.

When you file, the bonus income is added to all your other sources of income for the year, and this total amount is taxed according to your marginal tax brackets. The total amount withheld from your paychecks and bonus throughout the year is then credited against the total tax you owe. If your total withholding exceeds your tax liability, you receive a refund; if it’s less, you will owe the remaining balance.

You can see the total income and withholdings on your Form W-2 provided by your employer. Box 1 of the W-2 shows your total taxable wages, which includes your bonus. Box 2 reports the total federal income tax withheld, and Box 17 shows the total state income tax withheld.

Strategies to Reduce Your Bonus’s Taxable Amount

It is possible to legally reduce the immediate taxable amount of your bonus by directing a portion of it into pre-tax accounts. These strategies lower your adjusted gross income (AGI), which in turn reduces your overall tax bill for the year. You must make these arrangements with your employer’s human resources or payroll department before the bonus is actually paid out.

One effective strategy is to increase contributions to a tax-deferred retirement account. By contributing part of your bonus to a traditional 401(k) or 403(b) plan, you reduce your taxable income for the current year. The funds grow tax-deferred until you withdraw them in retirement.

Another option is to contribute bonus funds to a Health Savings Account (HSA) or a Flexible Spending Account (FSA). Contributions to an HSA are tax-deductible, the funds grow tax-free, and withdrawals for qualified medical expenses are also tax-free. Similarly, contributions to an FSA for healthcare or dependent care expenses are made with pre-tax dollars, which lowers your taxable income. You must check your employer’s plan rules for any specific limitations or procedures for making contributions from a bonus payment.