How Are Military Bonuses Taxed?
A military bonus is taxable, but your initial withholding isn't the final word. Learn how your total tax is calculated and what situations can change it.
Military bonuses for enlistment, reenlistment, or specific skills are a component of compensation that serve as incentives to attract and retain personnel. The Internal Revenue Service (IRS) considers these bonuses to be taxable income unless a specific exclusion applies. The final tax liability depends on several factors, including where the service member is serving and how the bonus is paid.
Federal and State Tax Withholding on Bonuses
When a military bonus is paid, the IRS categorizes it as supplemental wages. This classification means it is subject to a mandatory flat federal income tax withholding rate of 22% for any bonus amount up to $1 million. This withholding is handled automatically by the Defense Finance and Accounting Service (DFAS) and is distinct from the regular income tax withholding for base pay.
In addition to federal income tax, bonuses are also subject to Federal Insurance Contributions Act (FICA) taxes. This includes a 6.2% Social Security tax on wages up to the 2025 annual limit of $176,100, and a 1.45% Medicare tax on all wages. These payroll taxes are deducted from the bonus payment, and all amounts are reported on the service member’s Form W-2.
State income tax rules for military pay and bonuses vary considerably. Some states fully exempt military income from taxation, while others tax it like any other income. A service member’s state of legal residence, not their duty station, determines which state’s tax laws apply. If the state of legal residence taxes income, it may also have a specific withholding rate for supplemental wages or require withholding based on the service member’s W-4 information on file.
The combined effect of these withholdings means a service member receives a net bonus that is less than the gross amount. For example, a $10,000 bonus would have at least $2,200 withheld for federal income tax and $765 for FICA taxes, before any state tax withholding. This information is reflected on the service member’s Leave and Earnings Statement (LES).
Combat Zone Tax Exclusion for Bonuses
A significant exception to the taxability of military bonuses is the Combat Zone Tax Exclusion (CZTE). This provision allows service members to exclude income from federal taxation if it is earned while serving in a designated combat zone. For a bonus to qualify for this exclusion, the event triggering the payment, such as a reenlistment, must occur during a month in which the service member served in a combat zone.
The IRS maintains a list of locations designated as combat zones by presidential executive order, such as the Afghanistan area, the Kosovo area, and the Arabian Peninsula area. The list also includes direct support areas for combat operations where service members may qualify if they receive hostile fire or imminent danger pay. Service members should consult IRS Publication 3, Armed Forces’ Tax Guide, to verify qualifying locations.
The rules for the exclusion differ based on rank. For enlisted members and warrant officers, all military pay, including the full amount of a qualifying bonus, is excludable for any month they serve in a combat zone. For commissioned officers, the exclusion is capped monthly at the highest rate of enlisted pay plus any imminent danger or hostile fire pay received. A qualifying bonus will be reported in Box 12 of the Form W-2 with the code “Q.”
This exclusion applies only to federal income tax. Pay earned in a combat zone, including bonuses, remains subject to Social Security and Medicare (FICA) taxes. Therefore, FICA taxes will still be withheld from the payment.
Reconciling Withholding on Your Annual Tax Return
The 22% flat rate applied to a military bonus is a withholding, not a final tax. The actual tax liability on the bonus is determined when a service member files their annual federal income tax return, Form 1040. On the return, the bonus income is added to all other taxable income for the year and taxed according to the progressive marginal tax brackets.
The final tax owed is calculated based on the service member’s filing status, total income, deductions, and any available tax credits. The total federal income tax withheld throughout the year, including the 22% from the bonus, is then credited against this final tax liability. This reconciliation process determines whether the service member receives a tax refund or owes additional tax.
For many enlisted service members, their marginal tax bracket may be lower than the 22% flat withholding rate. For instance, a single service member might fall into the 12% tax bracket. In this scenario, the 22% withholding on their bonus is higher than the actual tax rate, resulting in an overpayment that will be returned as part of their tax refund.
Conversely, a service member with significant other household income might be in a marginal tax bracket higher than 22%, such as the 24% or 32% bracket. In this case, the 22% withholding on the bonus would be insufficient to cover the full tax liability for that income. This may result in owing additional tax when they file their return.
Tax Adjustments for Bonus Repayments
In some situations, a service member may be required to repay a bonus, often due to an early separation from the military before fulfilling the service obligation. If the bonus is repaid in the same calendar year it was received, the military should issue a corrected Form W-2. This form excludes the repaid bonus from the taxable wages reported in Box 1, ensuring the service member does not pay tax on income they did not keep.
When the bonus is repaid in a subsequent tax year, the service member cannot amend the prior year’s tax return. Instead, under the “Claim of Right” doctrine, if the repaid amount is more than $3,000, the service member can take a tax credit. This credit is taken in the year of repayment.
To calculate the credit, the service member must re-figure the tax for the year the bonus was received, but without including the bonus in their income. The difference between the tax they actually paid that year and this re-calculated tax amount can be claimed as a credit on their current year’s tax return. This adjustment allows the taxpayer to recover the tax originally paid.