Bonus tax and supplemental wages

The IRS calls bonuses, commissions, severance, back pay, awards and prizes paid to employees “supplemental wages”. IRS Publication 15 gives employers two ways to withhold federal income tax on them. Both are only estimates of the tax. The bonus is added to your other wages on the W-2, and the return taxes the total through the ordinary brackets.

The flat-rate method

If the bonus is paid separately from regular wages, or listed separately on the same pay stub, the employer may withhold a flat 22% of it. Your W-4, filing status and salary do not matter. Most large payroll systems use this method for annual bonuses because it is simple and predictable.

On a $10,000 bonus that is $2,200 of federal withholding. Social Security and Medicare take $620 and $145, the usual 7.65% combined. In Texas, with no state income tax, the bonus deposits as $7,035. The same bonus paid in California loses another $1,153 to state withholding and disability insurance and deposits as $5,882.

The aggregate method

The other method adds the bonus to a regular paycheck and withholds on the combined amount as though you earned that much every pay period. Then it subtracts what would have been withheld from the regular paycheck alone. Employers must use it when the bonus is not identified separately, and some use it by choice.

Because the withholding tables assume the big paycheck repeats all year, the method often pushes the bonus into a higher bracket for that one paycheck. For a single employee on $85,000 paid every two weeks, the aggregate method withholds $2,847 from the same $10,000 bonus, and the bonus deposits as $6,388. The shorter the pay period, the larger the effect: paid weekly, withholding on the bonus is $3,173; paid monthly, $2,339.

None of these figures changes the tax. The green bar is what the bonus adds to the employee’s federal tax for the year, $2,200, and it is the same whichever method payroll used.

When the flat rate is too much, and when it is too little

The flat rate is close to right when your top bracket is the same rate. The employee on $85,000 is in the 22% bracket, so the flat withholding and the real cost match.

For lower earners it over-withholds. Someone on $45,000 is in the 12% bracket. A $5,000 bonus has $1,100 withheld at the flat rate but adds only $600 to the year’s tax. The other $500 comes back as part of the refund.

For higher earners it under-withholds. On a $200,000 salary the top bracket is 24%. A $10,000 bonus has $2,200 withheld but adds $2,400 to the tax, leaving $200 to be paid with the return. Several large bonuses or a big equity vest in the same year can turn that gap into a real bill, and possibly an underpayment penalty. A Step 4(c) amount on the W-4 or an estimated payment closes it; the quarterly estimated taxes guide explains the safe harbors.

Bonuses over the threshold

Once supplemental wages from one employer pass $1,000,000 in a year, the excess must be withheld at 37%, the top income tax rate. There is no choice of method and the W-4 does not matter, even one claiming exemption. A $1,500,000 bonus paid at once has $405,000 of federal tax withheld: the flat rate on the first $1,000,000 and the top rate on the other $500,000.

Social Security, Medicare and the wage base

FICA treats a bonus like salary. Social Security applies until wages for the year reach $184,500, and Medicare applies to everything, with the extra Medicare tax on wages above the withholding threshold. A large bonus early in the year can use up most of the wage base, so later paychecks show no Social Security. That is not a saving; it is the year’s Social Security paid early. The FICA guide shows the paycheck where it happens.

State withholding

States set their own rules. Some publish a flat supplemental rate, some require the aggregate approach, and states without an income tax withhold nothing. State disability and paid-leave programs, such as California’s SDI or New Jersey’s family leave insurance, usually apply to bonuses as they do to salary. Our calculator withholds state tax on a bonus as the state’s regular method would on the paycheck it is paid with.

Ways to keep more of a bonus

• Defer some into a traditional 401(k), if your plan allows deferrals from bonuses. That part skips federal income tax and, in most states, state income tax. The 2026 limit is $24,500 across all your deferrals for the year, so check how much room is left.
• Contribute to an HSA through payroll if you have a qualifying health plan; payroll HSA contributions also skip FICA.
• Time it, where you have the choice. A bonus counts in the year it is paid. A December bonus that would push you into a higher bracket can be worth less than the same bonus in January of a lower-income year. Most employees cannot choose the date, and for most the difference is small.

Asking payroll to use a different method is not a way to save tax. It moves money between your paycheck and your refund, nothing more.

Reading the bonus stub

A bonus usually arrives on its own stub, or as a separate earnings line with its own withholding. Check that federal withholding is the flat rate, or explained by the aggregate method, and that 401(k) deferrals were or were not taken as you elected. If the stub shows no Social Security, look at the year-to-date wages: you may already be past the base.

Every figure on this page is computed by the same code as our calculators. How we calculate.