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Who doesn’t love a good bonus? Whether it’s a performance-based reward, a holiday surprise, or a signing bonus, getting extra money on top of your salary always feels great. But before you plan how to spend it, you might notice something frustrating: your bonus check is smaller than you expected.
So, what happened? Taxes happened. Bonuses are taxed differently than your regular paycheck, and understanding how this works can help you keep more of your hard-earned money. In this guide, I’ll break down why bonuses are taxed differently, how employers calculate taxes on bonuses, and ways to reduce tax withholding so you don’t lose more than necessary.
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How Are Bonuses Taxed?
The IRS classifies bonuses as “supplemental wages,” meaning they are treated differently than your regular paycheck for tax withholding. Your employer must withhold federal income tax, Social Security tax (6.2%), Medicare tax (1.45%), and potentially state taxes, depending on where you live.
Here’s what gets deducted from your bonus:
1. Federal Income Tax
Bonuses are taxed at the federal level using one of two methods:
- The Flat 22% Rate – If your employer pays your bonus separately, a standard 22% federal tax rate is applied (for bonuses up to $1 million).
- The Aggregate Method – If your bonus is included in your regular paycheck, tax is withheld at your normal income tax rate, which could be higher than 22%.
If your total bonus exceeds $1 million, the portion above $1 million is taxed at 37%.
2. Social Security & Medicare Taxes
Regardless of how your bonus is paid, you’ll still owe Social Security and Medicare taxes:
- Social Security Tax (6.2%) – Applied to income up to $168,600 in 2025.
- Medicare Tax (1.45%) – Applied to all wages, plus an extra 0.9% for incomes over $200,000 (single) or $250,000 (married).
3. State and Local Taxes
- Some states use a flat bonus rate (e.g., California taxes bonuses at 10.23%).
- Other tax bonuses are at the same rate as your regular income.
- If you live in a state with no income tax (like Texas or Florida), you won’t owe state taxes on your bonus!
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Why Are Bonuses Taxed Differently?
The IRS considers bonuses to be “supplemental wages.” This means they aren’t taxed at the same rate as your regular paycheck, even though they are still income. Other types of supplemental wages include:
- Severance pay
- Overtime pay (if categorized separately)
- Commissions
- Back pay
- Prizes and awards
- Accumulated sick leave payouts
Since the IRS treats bonuses as extra income, your employer has two different methods to calculate how much tax to withhold. The method used can greatly impact how much of your bonus you actually take home.
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Two Ways Employers Tax Bonuses
Employers have two options for withholding taxes on your bonus:
1. The Percentage Method (Flat 22% Rate)
This is the most straightforward way to tax a bonus. If your employer separates your bonus from your regular paycheck, they can apply a flat 22% withholding rate on any bonus up to $1 million.
If you receive a bonus over $1 million, the portion above $1 million is taxed at 37%.
Example: Flat 22% Tax on a Bonus
- You receive a $5,000 bonus.
- Your employer withholds 22% ($1,100) for federal taxes.
- You take home $3,900 before other deductions (like Social Security and Medicare).
This method is usually preferred because it doesn’t push you into a higher tax bracket—it simply applies a fixed rate.
2. The Aggregate Method (Treated Like Regular Pay)
If your employer lumps your bonus into your regular paycheck, they must withhold taxes based on your marginal tax rate, which is determined by your total annual income. This means your bonus could be taxed much more, especially if it temporarily pushes your income into a higher tax bracket.
Example: Bonus Taxed with the Aggregate Method
- Your regular monthly salary is $6,000.
- Your employer gives you a $10,000 bonus in the same paycheck.
- The payroll system calculates tax withholding as if you make $192,000 per year ($16,000 × 12 months).
- Your tax bracket jumps from 22% to 32%, so more tax is withheld.
The result? Your paycheck is smaller than expected! But the good news is that if too much tax was withheld, you may get some back when you file your return.
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How to Lower the Taxes on Your Bonus
If you want to keep more of your bonus, there are a few smart strategies you can use.
1. Ask Your Employer to Use the 22% Flat Rate
If your bonus is being lumped in with your regular paycheck, ask your employer to pay it separately so it can be taxed at the lower 22% flat rate instead of a higher withholding amount.
2. Contribute to a 401(k) or IRA
If you haven’t maxed out your contributions, put part of your bonus into a retirement account.
Contributions to a traditional 401(k) or IRA are tax-deferred, meaning you won’t pay income tax on that portion now—you’ll pay it when you withdraw in retirement.
3. Adjust Your Withholding on Form W-4
Use the IRS Tax Withholding Estimator to determine if too much tax is being taken from your bonus. If so, update your Form W-4 with your employer.
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Are There Any Exceptions to Bonus Taxation?
The IRS doesn’t miss a chance to take its share, and bonuses are no exception—whether they come as cash, gift cards, a vacation package, or stock options, they’re typically taxable. However, a loophole might help you avoid paying federal taxes on certain types of bonuses.
The Employee Achievement Award Exception
If your bonus is structured as an employee achievement award, you could dodge federal income taxes—but only if it meets these strict conditions:
- It’s NOT cash or a cash equivalent – This means no gift cards, event tickets, vacations, stocks, or bonds.
- It must be tangible property – Think of items like a watch, plaque, or company-branded gear.
- Its value can’t exceed $1,600. If it’s more than that, the excess amount will be taxable.
Consider it a benefit if your company rewards you with a tax-free achievement award. But if your bonus comes as a cash payout, expect the IRS to take its cut.
Will You Get a Tax Refund or a Surprise Bill?
How your employer calculates tax withholding on your bonus can greatly impact whether you get a refund or owe money when you file your taxes.
- If too much tax was withheld – You could receive a tax refund for overpayment when you file your return.
- If too little tax was withheld, you may owe the IRS when tax season arrives.
Review your Form W-4 to avoid surprises, which tells your employer how much tax to withhold from your paycheck. The IRS Tax Withholding Estimator is also useful to check if you’re on track. If you receive a large bonus or experience a significant financial change, consulting a tax professional can help ensure you’re withholding the correct amount.
How Social Security, Medicare, & State Taxes Impact Bonus Pay
Federal withholding isn’t the only deduction from your bonus. Other mandatory taxes include:
- Social Security Tax: 6.2% (on earnings up to $168,600 in 2025)
- Medicare Tax: 1.45% (plus an extra 0.9% if your income exceeds $200,000 for single filers or $250,000 for married couples)
- State Income Tax: Varies by state—some states don’t tax bonuses at all, while others use a flat rate or your regular income tax rate.
- Pro Tip: If you live in a state with no income tax (like Texas, Florida, or Nevada), you’ll keep more of your bonus!
How to Lower the Taxes on Your Bonus
If you want to keep more of your bonus, there are a few smart strategies you can use.
1. Ask Your Employer to Use the 22% Flat Rate
If your bonus is being lumped in with your regular paycheck, ask your employer to pay it separately so it can be taxed at the lower 22% flat rate instead of a higher withholding amount.
2. Contribute to a 401(k) or IRA
If you haven’t maxed out your contributions, put part of your bonus into a retirement account.
Contributions to a traditional 401(k) or IRA are tax-deferred, meaning you won’t pay income tax on that portion now—you’ll pay it when you withdraw in retirement.
401(k) contribution limits for 2025: $23,000 (or $30,500 if you’re 50+).
3. Adjust Your Withholding on Form W-4
Use the IRS Tax Withholding Estimator to determine if too much tax is being taken from your bonus. If so, update your Form W-4 with your employer.
>> File Taxes with Confidence Using TurboTax! >>
Best Tax Software to Help You Manage Bonus Taxes
If you want to ensure you’re not overpaying taxes on your bonus, the right tax software can help. Here are some of the best options:
TurboTax has a user-friendly interface and step-by-step guidance, making it an excellent choice for those who want a simple and intuitive filing experience. It asks easy-to-understand questions about your financial situation and fills out the necessary tax forms for you.
TurboTax also offers various tiers, including a free version for basic tax situations and paid plans for those with investments, self-employment income, or more complex deductions. Users can access live tax experts for personalized assistance.
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H&R Block stands out by offering both online tax filing and in-person help at its physical locations. It’s ideal for individuals who prefer expert help and want the flexibility to switch between online and face-to-face support.
H&R Block provides a free version for simple tax returns and more advanced plans for those with complex tax needs. The ability to walk into an office and get professional guidance from a tax expert makes it a top choice for filers who need extra confidence in their tax return.
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TaxSlayer is a budget-friendly alternative that offers a straightforward tax filing experience at a lower cost than its competitors. It’s particularly well-suited for self-employed individuals and those with more complex tax situations who want an affordable yet effective option.
TaxSlayer provides free customer support and includes audit assistance with its higher-tier plans. It allows filers to maximize deductions while keeping costs down, making it a great choice for those who want a DIY approach without overspending on tax services.
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FAQs: Are Bonuses Taxed Differently?
Final Thoughts: Keep More of Your Bonus!
Yes, bonuses are taxed differently than regular income, but understanding how they’re taxed can help you plan ahead and keep more money in your pocket. By knowing how bonus taxes work, you can make smart financial moves and enjoy your extra income without giving too much away to the IRS!
>> TurboTax: Your Trusted Tax Filing Solution! >>
Patrick is a financial expert with deep knowledge in trading, technical analysis, and market structure. His analytical skills and ability to simplify complex topics have made him a trusted advisor for firms looking to navigate the financial markets effectively. Recognized for his insightful reports and strategic market analysis, Patrick has earned high praise from industry professionals. He is also the host of a widely-followed podcast, where he delves into market trends, options trading, and value investing, providing actionable insights for investors and professionals alike.
