How Are Employee Bonuses Taxed in Michigan?

An employee bonus is supplemental income from an employer that is subject to its own tax withholding rules. For employees in Michigan, bonus payments are subject to federal taxes, state taxes, and other payroll deductions, which affects the final amount you receive.

Federal and FICA Tax Withholding on Bonuses

The Internal Revenue Service (IRS) categorizes bonuses as “supplemental wages,” with distinct withholding rules compared to regular salary. Employers use one of two methods to calculate federal income tax withholding on these payments.

The first option is the percentage method, where an employer withholds a flat 22% from the bonus for federal income tax. This rate applies to all supplemental wages up to $1 million in a calendar year, with any excess amount subject to a 37% rate. This method is used when the bonus is issued as a standalone check.

The alternative is the aggregate method, used when the bonus is combined with regular wages. The employer calculates withholding on the combined amount based on your Form W-4 information. This treats the payment as one larger paycheck for that pay period, which can push you into a higher withholding bracket for that check.

Your bonus is also subject to Federal Insurance Contributions Act (FICA) taxes, which fund Social Security and Medicare. The Social Security tax is 6.2% and the Medicare tax is 1.45%. The Social Security tax only applies up to an annual income limit of $176,100 for 2025.

Michigan State Tax Withholding on Bonuses

Michigan has a flat tax system, meaning all income, including bonuses, is taxed at a single rate. For 2025, Michigan’s flat income tax rate is 4.25%, and your employer must withhold this amount from your bonus for state taxes.

Unlike the federal system, Michigan’s approach is straightforward. The same 4.25% rate applies regardless of whether the bonus is paid separately or with your regular paycheck.

Some cities in Michigan also levy local income taxes, which would be withheld in addition to the state rate. The amount withheld is remitted to the Michigan Department of Treasury by your employer.

Understanding Your Pay Stub and Final Tax Liability

Your bonus pay stub provides a detailed breakdown of all deductions. It will show the gross bonus amount followed by itemized subtractions for federal, state, Social Security, and Medicare taxes, arriving at the net take-home amount.

The amount withheld from your bonus is an estimated payment and not the final tax you will owe. Your final tax liability is determined when you file your annual federal and state tax returns, where the bonus is added to your total earnings for the year.

This total annual income determines your marginal tax bracket. The belief that bonuses are “taxed more” stems from the flat 22% federal withholding, which may be higher than the rate on your regular pay.

However, the final tax is calculated on your entire income. If the total amount withheld exceeds your tax liability for the year, you will receive a refund. If not enough was withheld, you will owe additional tax.

Strategies for Managing Bonus Taxation

One strategy is to contribute a portion of the bonus to a pre-tax retirement account, such as a traditional 401(k) or IRA. This can lower your adjusted gross income (AGI) for the year because the contributed amount is not counted as taxable income.

For example, contributing a $5,000 bonus to your traditional 401(k) means you will not pay federal or state income tax on that amount in the current year. This approach provides a tax benefit and accelerates retirement savings, but you must stay within annual IRS contribution limits.

Another strategy involves adjusting your tax withholding by submitting a new Form W-4. You can request that an additional dollar amount be withheld from your remaining paychecks. This can help you avoid a surprise tax bill when you file your annual return.