Why Is My Bonus Taxed So High? A Look at Tax Rules

When you receive a bonus, the amount withheld for taxes can seem disproportionately high compared to the taxes taken from your regular salary. This is a common experience stemming from specific tax withholding rules that apply to this type of pay. Understanding the reasons for this higher withholding is the first step in seeing the complete picture of how your total annual income is taxed.

Bonuses as Supplemental Wages

The Internal Revenue Service (IRS) distinguishes between regular wages and supplemental wages. Regular wages are the predictable payments you receive for a payroll period, such as your salary or hourly pay. Supplemental wages are compensation paid to an employee that falls outside of their regular pay, a category that includes payments like bonuses, commissions, overtime, and severance pay.

Because these payments are not part of a consistent salary, the IRS has established specific guidelines for how employers must handle tax withholding on them. The rules are designed to approximate the tax due on this additional income, but the methods can result in a higher initial withholding amount. An employer must identify these payments and apply one of the specific withholding methods prescribed by the IRS. This ensures that taxes are collected on this income as it is earned, rather than leaving a large tax bill for the employee to settle at the end of the year.

Federal Bonus Withholding Calculations

The primary reason your bonus seems heavily taxed is that employers often use the “percentage method” for federal income tax withholding. Under this approach, employers withhold a flat 22% on all supplemental wages up to $1 million for the tax year. This rate is applied directly to the bonus payment, regardless of the employee’s regular income tax bracket or the information on their Form W-4.

For any supplemental wages that exceed the $1 million threshold in a calendar year, the withholding rate increases. The IRS mandates that employers must withhold at a 37% rate on these excess amounts, which corresponds to the highest marginal income tax bracket. This is a mandatory rate, and it applies even if an employee’s tax situation would place them in a lower bracket.

An alternative approach is the “aggregate method,” which is used when the bonus is paid along with regular wages in the same paycheck. The employer combines the bonus and regular salary, then calculates the required income tax withholding on the total amount as if it were a single paycheck for that pay period. This can temporarily push the employee’s earnings for that period into a much higher withholding bracket.

Beyond federal income tax, bonuses are also subject to other payroll taxes. These include Social Security taxes at a rate of 6.2% and Medicare taxes at 1.45%, collectively known as FICA taxes. For 2025, the Social Security tax applies only to the first $176,100 of wages. State and local governments also have their own rules for withholding on supplemental income.

Withholding vs Final Tax Liability

It is important to understand the difference between the money withheld from your bonus and your actual, final tax liability. The amount withheld is not the final tax; it is an estimated prepayment toward your annual tax obligation. Your true tax bill is calculated when you file your federal income tax return using Form 1040.

When you prepare your tax return, all sources of income, including your regular salary and any bonuses, are added together to determine your total gross income. From this total, you subtract deductions to arrive at your taxable income, which is then used to calculate your tax liability based on the marginal tax brackets.

The high amount withheld from a bonus can mean the federal government holds more of your money than you will actually owe. If the total amount withheld from all your paychecks exceeds your calculated tax liability, the difference is not lost. This overpayment is returned to you by the IRS as a tax refund. The higher withholding on a bonus acts as a safeguard against underpayment for many taxpayers, contributing to the total taxes you have prepaid for the year.

Adjusting Your Overall Tax Withholding

While you cannot change the mandatory withholding rates on a bonus, you do have control over the total amount of tax withheld from your paychecks. The primary tool for this is the Form W-4, Employee’s Withholding Certificate. This form tells your employer how much tax to withhold from your regular pay, and you can submit an updated version at any time.

If you find that the high withholding on a bonus consistently leads to a large tax refund, it means you are overpaying your taxes during the year. You can adjust your W-4 to have less tax withheld from your regular paychecks. This increases your take-home pay throughout the year and results in a smaller refund.

Conversely, if you receive large bonuses and are concerned about owing money when you file your taxes, you can use the Form W-4 to have more tax withheld from your regular salary. Indicating an additional amount to be withheld each pay period helps cover the tax liability from your supplemental income. This strategy helps avoid a surprise tax bill at the end of the year.