But bonuses face different federal tax withholding rates than your regular paycheck, which often catches people off guard.
Most bonuses have taxes withheld at 22%, with bonuses over $1 million taxed at 37%. The actual amount deducted depends on how your company issues the bonus, which can create tax surprises come filing season.
If you're dealing with complex bonus tax situations, our best tax relief services can help you navigate the process. This article will explain how bonus taxation works and provide strategies to avoid unexpected tax bills.
How Are Bonuses Taxed in 2025?
The federal tax withholding rate for bonuses is 22% for bonuses under $1 million and 37% for bonuses over $1 million. However, the actual amount deducted from your paycheck depends on how your employer issues your bonus—either as part of your regular paycheck or separately.
Your bonus will be taxed using one of two methods: the flat-rate method or the aggregate method.
Flat-Rate Method
The flat-rate method taxes your bonus at the standard 22% federal rate when issued on a separate paycheck.
"This happens when your bonus is considered supplemental income and typically appears on a separate paycheck from your regular income," says Christine Damico, CFP and financial planner at Domain Money.
This method is straightforward to calculate. If you earn a $10,000 bonus, you can expect $2,200 withheld for taxes and $7,800 issued to you.
The downside is that this flat rate may not match your actual tax bracket, creating surprises at tax time. "I see clients frustrated because they receive big refunds or tax bills due to bonuses," says Damico.
"Someone in the 12% bracket getting taxed at 22% has too much withheld. Conversely, a couple in the 35% bracket with only 22% withheld faced a large tax bill and penalties for underpaying," informs Damico.
Aggregate Method
The aggregate method combines your bonus with your regular salary, applying your standard income tax withholding rate to both. If you normally withhold 35% from your paycheck, the same rate applies to your bonus.
This method is generally more accurate than the flat-rate method and helps ensure sufficient taxes are withheld. However, it can lead to excessive withholdings, resulting in a larger refund on your tax return but less bonus money upfront.
Common Types of Bonuses and How They're Treated
Most bonuses are treated the same for tax withholding purposes, regardless of why you receive them. All of the following count as supplemental income and are taxed at the rates defined above:
- Signing bonuses: Cash rewards for accepting a new job position.
- Year-end bonuses: Annual bonuses are typically paid during the holiday season.
- Performance bonuses: Merit-based bonuses paid throughout the year for meeting goals or exceptional work.
- Holiday bonuses: Seasonal bonuses given during holidays or special occasions.
All supplemental wages are also subject to Social Security and Medicare taxes in addition to federal income tax withholding.
Exception: Employee achievement awards have different rules, with maximum tax-free amounts of $1,600 for qualified plans and $400 for non-qualified plans.
Why Your Bonus Seems Heavily Taxed
Bonuses feel over-taxed because they're withheld at different rates than your regular paycheck, making it seem like you're losing more money than expected.
"Often when people receive bonuses, it can feel like they're losing a lot in tax," says Kari Brummond, licensed enrolled agent at TaxCure.
The main reasons bonuses feel heavily taxed include:
- Higher withholding rates: If your standard income tax rate is 12% but 22% of your bonus is withheld, it seems excessive—even though you're likely to receive a tax refund.
- Paycheck shock: "If you usually get paid $1,000 per week but one week you get a bonus bringing your payment to $2,000, taxes will be withheld as if you make $2,000 every week. That can be startling if you were expecting your paycheck to be twice as big," Brummond explains.
- Tax bracket bumps: Even with the aggregate method, the extra income could push you into a higher tax bracket, meaning you didn't withhold enough from earlier paychecks and may face a higher-than-expected tax bill.
Tax Planning Strategies for Bonuses
If you're worried about owing a higher tax bill because of your bonus, several strategies can help you plan for the cash influx.
- Adjust your W-4 withholdings: Review your withholdings since supplemental income is included in your total income for calculating your tax bracket, and you may need to increase withholdings to account for this.
- Reduce taxable income: "If you're trying to eliminate a bad tax surprise, consider contributing to a pre-tax retirement plan like a 401(k), maxing out your Health Savings Account, or making estimated tax payments," says Damico. Remember that these contributions reduce your taxable income beyond the standard deduction.
- Request payment deferral: If you worry a bonus will push you into the next tax bracket, ask your employer to defer payment until the following year, especially if you expect to make less money that year.
- Decrease withholdings if over-taxed: "If you're feeling cash poor because of too much withholding from your bonus, then it may be time to revisit your W-4 elections," Damico explains.
State Bonus Tax Withholding
The 22% or 37% rates cover only federal income tax withholding. Your state may impose additional taxes beyond the federal taxes on bonus income based on its specific supplemental income policies.
State approaches vary significantly:
- Flat-rate states: Alabama withholds a flat 5% for supplemental wage payments.
- Regular-rate states: Massachusetts taxes bonuses at the same rate as regular income.
- Find your state's rules: Check your state's official government website for specific supplemental income tax policies that apply to your bonus.
Frequently Asked Questions
How much is a $10,000 bonus after taxes?
A $10,000 bonus typically has $2,200 withheld for federal taxes (22% rate), leaving you with $7,800. However, your actual tax liability depends on your total income and tax bracket, so you may owe more or receive a refund when filing your return.
Why do bonuses get taxed at 40%?
Bonuses don't actually get taxed at 40%. The federal withholding rate is 22% for bonuses under $1 million. If you see higher deductions, it's likely due to the aggregate method, where your bonus is added to your regular pay, creating a higher withholding rate, or additional state taxes and FICA taxes.
Can I put all of my bonus in my 401(k) to avoid taxes?
You can contribute part of your bonus to your 401(k) to reduce taxable income, but there are annual contribution limits ($23,000 for 2024, or $30,500 if you're 50 or older). You cannot contribute 100% of your bonus if it exceeds these limits, and some employers have policies limiting bonus contributions.
