How Are Bonuses Taxed?

If you’ve received a bonus at work, congrats! It feels good to be acknowledged for your hard work. But before you start planning on how to spend (or save) your bonus, be aware that it is subject to federal income tax (and state, if applicable) – so what you end up taking home may be less than what you expected.

Generally speaking, the amount that’s taken out for taxes depends, in part, on how your employer chooses to issue bonus payments as well as the amount of your bonus. Ahead, we’ll provide a basic overview of how bonuses are taxed at the federal level. If you have questions about your specific situation, it’s always a good idea to consult a tax professional.

How bonuses below $1 million are taxed

Employers are usually required to take (or “withhold”) a portion of an employee’s paycheck to pay taxes on his or her behalf. The amount that’s withheld is known as a withholding tax.

According to the IRS, bonuses have their own special tax withholding rules as they’re treated as “supplemental wages” instead of regular wages. The IRS provides employers with two general methods to help calculate the federal withholding tax for bonuses.

1. The percentage method (or flat-rate method)

Some employers may choose to issue bonuses as a separate payment from your regular wages. In other words, you’d receive a separate check for your bonus. In such cases, your employer may use the percentage method and withhold 22% of your bonus for federal income tax purposes. For example, let’s say you received a $5,000 bonus. Your employer would withhold $1,100 from your $5,000 (22% x $5,000). 

2. The aggregate method

Some employers may choose to issue bonuses as part of your regular wages – that is, your bonus is included or combined with your regular wages via one single payment. If this is the case, your employer would withhold federal income tax as if the total were a single payment for a regular payroll period. In other words, your employer would follow the standard withholding formula based on the information on your W-4 form.

See IRS’s “Supplemental Wages” in Publication 15 (Circular E) for more information about tax withholding as well as sample calculations.

Keep in mind that the calculation methods outlined above are for determining your federal income tax withholding only. In addition to this, your employer usually has to withhold another portion for FICA taxes (Social Security and Medicare) as well as state and local taxes (if applicable). If you have questions about your specific tax situation, consult a tax professional.

For bonuses over $1 million

If your bonus exceeds $1 million, your employer is required to withhold a little more for taxes. Let’s say you received a $1.5 million bonus: The first $1 million is subject to a flat 22% federal withholding tax, and the amount in excess of $1 million ($500,000) is subject to a 37% tax (or the highest income tax rate for the year).

• $1,000,000 x 22% = $220,000 (withholding on first $1 million)
• $500,000 x 37% = $185,000 (withholding on amount over $1 million)
• $220,000 + $185,000 = $405,000 (total amount withheld from your bonus)