How Will My Bonus Be Taxed? A Breakdown of Withholding Methods

A work bonus can be a great financial boost, but it often comes with unexpected tax implications. Many employees are surprised when their bonus is taxed at a higher rate than their regular paycheck. Understanding how bonuses are taxed can help you plan ahead and avoid surprises.

Federal Withholding

The IRS treats bonuses as supplemental income, meaning they are subject to federal income tax withholding just like regular wages. However, the withholding rate for supplemental wages differs from regular paycheck withholdings.

For 2024, the IRS requires a flat 22% withholding rate on bonuses up to $1 million when paid separately from regular wages. If your bonus exceeds $1 million, the portion above that threshold is withheld at 37%. These rates apply regardless of your actual tax bracket, meaning the amount withheld may not match what you ultimately owe when you file your tax return.

Bonuses are also subject to payroll taxes. Social Security tax is 6.2% on earnings up to $168,600 in 2024, while Medicare tax is 1.45% on all wages. An additional 0.9% Medicare surtax applies to income above $200,000 for single filers and $250,000 for married couples filing jointly. These payroll taxes are automatically withheld, further reducing your take-home amount.

State and Local Withholding

State and local tax withholding on bonuses varies based on where you live and work. Some states, like California and New York, have specific supplemental wage withholding rates. In 2024, California withholds bonuses at a flat 10.23%, while New York uses a progressive structure based on total income.

In states without a separate supplemental wage rate, employers typically apply the same withholding method used for regular wages. This can sometimes result in a higher initial deduction if your bonus temporarily pushes you into a higher tax bracket. States with progressive tax systems may tax additional income at higher rates, further affecting your take-home pay.

Local taxes can also reduce your bonus. New York City imposes an additional tax on residents, and some municipalities in Pennsylvania, Ohio, and Kentucky levy local income taxes. If you work in one state but live in another, tax credits or reciprocal agreements may help prevent double taxation, though withholding may still occur in both locations.

Methods of Withholding

Employers use different methods to determine how much tax to withhold from your bonus, affecting how much you receive upfront and what you may owe at tax time. The IRS allows two primary approaches: the percentage method and the aggregate method. Employees can also request additional withholding to manage their tax liability.

Percentage Method

Under this approach, employers withhold a flat 22% on bonuses up to $1 million. If the bonus exceeds $1 million, the portion above that threshold is withheld at 37%. This method simplifies payroll processing and provides a consistent withholding percentage.

For example, if you receive a $10,000 bonus, your employer will withhold $2,200 (22%) for federal income tax. This does not include Social Security, Medicare, or state and local taxes, which will further reduce your net amount. While this method ensures a predictable withholding rate, it may result in over- or under-withholding depending on your total taxable income for the year. If your actual tax rate is lower than 22%, you may receive a refund when you file your return. If your total income places you in a higher bracket, you may owe additional taxes.

Aggregate Method

This method calculates withholding by adding your bonus to your most recent regular paycheck and applying the tax rate based on your total earnings. Employers use IRS withholding tables from Publication 15-T to determine the appropriate amount. Because this approach treats the bonus as part of your regular wages, it can sometimes result in a higher withholding rate than the percentage method.

For instance, if your normal paycheck is $3,000 and you receive a $10,000 bonus, your employer will withhold taxes as if you earned $13,000 in a single pay period. If this temporarily pushes you into a higher tax bracket, the withholding rate may be higher than 22%, reducing your immediate take-home pay. However, your final tax liability is determined when you file your return. Employees who experience unexpectedly high withholding under this method may adjust their Form W-4 to modify future withholdings.

Additional Withholding

Employees who anticipate owing more taxes due to a bonus can request extra withholding to avoid a large tax bill at the end of the year. This can be done by submitting a new Form W-4 to their employer and specifying an additional dollar amount to be withheld from each paycheck.

For example, if you expect your total income to place you in a higher tax bracket, you might request an extra $500 or $1,000 in withholding from your bonus to cover the difference. This can be useful for those who receive large bonuses or have other taxable income, such as investment earnings or freelance work. Increasing withholding can also help avoid underpayment penalties, which the IRS may impose if you owe more than $1,000 when filing your return.

This strategy can also help employees who prefer to spread out their tax payments rather than facing a lump sum due at tax time. However, it’s important to balance additional withholding with cash flow needs to ensure enough take-home pay remains for regular expenses.

Effects on Your Tax Bracket

Receiving a bonus increases your taxable income, which may push you into a higher marginal tax bracket. However, this does not mean your entire income is taxed at the higher rate. The U.S. federal tax system is progressive, meaning different portions of your income are taxed at different rates, ranging from 10% to 37% in 2024.

For example, if your regular salary is $95,000 and you receive a $10,000 bonus, your total taxable income rises to $105,000. If this amount crosses from the 22% bracket into the 24% bracket, only the income above the threshold—$105,000 minus $100,525—will be taxed at the higher rate. The rest remains taxed at the lower applicable rates. Many employees mistakenly believe that moving into a higher bracket means their entire income is taxed at that rate, but only the portion exceeding the bracket threshold is affected.