How Are Bonuses Taxed?

Matt Boyd is an senior director of High-Net-Worth Tax Planning at Northwestern Mutual.

Whether it’s expected or not, receiving some extra cash and recognition from your employer as a bonus is always appreciated. But the IRS will want its fair share of your windfall amount. This means the amount you’re told you’ll receive won’t match the final amount that ends up in your bank account.

To make things more complicated, a bonus is considered supplemental wages, which means it’s subject to its own tax withholding rules. So, here’s what you need to know about how bonuses are taxed to help you plan accordingly.

What are supplemental wages?

Supplemental wages are payments you get as an employee on top of your regular base salary or wages. In addition to bonuses, this category includes equity compensation like stock options, overtime, tips, commissions, accumulated sick time and prizes or other awards. The kicker is that supplemental wages are subject to their own tax withholding rules that are different from your regular pay.

But not everything counts as a bonus. You won’t owe tax on small perks like coffees or snacks, occasional tickets to entertainment events or meals. The IRS calls these de minimis fringe benefits because of their low value and the fact that they tend to be provided infrequently. But in general, additional pay you receive from your employer will be subject to tax.

What is the bonus tax withholding rate?

Many companies award cash bonuses to the employees who reach certain performance benchmarks. At the end of the year, your bonus is included on your W-2 and is taxed just like the rest of your wages. But when your company pays the bonus, it withholds taxes—and that withholding isn’t always as straightforward as you might think.

The difference between bonus tax withholding and actual tax paid on a bonus

Because of the way taxes are withheld on bonuses, many people think bonuses are taxed at a higher rate—and sometimes, taxes are withheld at a higher rate than what might be withheld on the rest of your pay. But when you file your tax return at the end of the year, your tax rate on your bonus will be the same as the tax rate on the rest of your wages. If more was withheld than necessary, you’ll get a refund for the excess withholding on the bonus.

The reverse is also true. If you’re a high earner in a higher tax bracket, you may have insufficient withholding on a bonus and could owe additional tax when you file your return. You may need to make an additional payment in the same quarter you got the bonus—otherwise, late-payment penalties and interest could apply.

How is the bonus tax rate calculated?

Taxes for supplemental wages, including your bonus, can be withheld in one of two ways. Your employer may withhold a flat percentage of your bonus, or they might calculate a more specific withholding amount based on your base pay and bonus. Here’s how each one works.

The flat percentage method

If your employer pays your bonus separately from your regular pay, they’ll likely use the flat percentage method. Per IRS rules, they’ll withhold 22 percent for bonuses when year-to-date wages, inclusive of the bonus, are up to $1 million. Once wages, including the bonus, exceed $1 million, then the withholding rate increases to 37 percent on supplemental wages. So, the point in the year when a bonus is paid can impact the flat withholding rate for high earners.

Pros and cons of the flat percentage method

The nice thing about the flat percentage method is that it’s easy for employers to calculate and apply. The downside is that many people have an average tax rate that’s lower than 22 percent. If you fall into this camp, more money will be withheld from your bonus than necessary—and you’ll have to wait until you file your tax return to get what you’re owed.

Keep in mind that if your average tax rate is higher than 22 percent, you may not be withholding enough tax with this method. You could owe money at tax time, and you should determine if a payment needs to be made during the year to avoid penalties.

The aggregate method

If your employer pays your bonus in the same check as your regular pay, they’ll use the aggregate method. This is more complicated compared to the flat percentage method because it requires your employer to consider both your regular wages and your bonus and compute a withholding amount for that pay period only.

Taxes are structured so that people with higher income pay a higher tax rate. The federal tax system divides income into segments, or “brackets,” and each bracket is taxed at a progressively higher rate. These brackets range from 10 percent to 37 percent. Depending on how much income you have in each bracket, your average tax rate will fall somewhere in the middle of this range. Payroll systems estimate the total tax you would owe based on these brackets if each paycheck was the same. With the aggregate method, it is assumed that your paycheck that includes the bonus is the paycheck you receive in every pay period and thereby determines a higher average tax rate to use in that paycheck. Here’s an example.

Let’s say you’re single and your base pay in 2025 was $75,000 per year. You’re paid biweekly at $2,885 per pay period (before taxes). Based on IRS payroll tables, and subject to the elections made on Form W-4, this would result in withholding of $298, a rate of 10.3 percent.

If you received a $5,000 bonus, and your employer used the aggregate method to determine your withholding, they would:

1. Add the bonus to your base monthly pay: $5,000 bonus + $2,885 base pay = $7,885.

2. Determine withholding on this higher amount: Using the same table as above, the withholding amount would be $2,051, a rate of 26 percent.

3. Subtract any taxes already withheld from your paycheck on base pay: This isolates the withholding on the bonus. The bonus withholding amount is $1,752, a rate of 35 percent.

The remainder would then be withheld from your bonus for that pay period.

Pros and cons of the aggregate method

The aggregate method is more complicated for your employer to compute but will ensure that there is never too little withholding on a bonus. However, this can result in even more excess withholding than the flat percentage method, especially if the bonus is high compared to regular pay. In this example, the withholding amount on the bonus paycheck is essentially the withholding amount for a single individual who earns $205K per year, whereas the individual actually earns $80K per year, inclusive of the bonus. It’s less common for employers to use this withholding method, and neither method is perfect.

Other taxes that apply to bonuses

In addition to the federal tax discussed above, it’s important to remember that your bonus will be subject to other taxes as well. This includes state income tax, assuming you live in a state with an income tax, and Social Security and Medicare taxes.

How bonuses work with state income tax

Depending on where you live, you may have to pay state taxes on your bonus. Some states have a supplemental wage withholding rate, while others treat the bonus the same as other wages. Because state taxes have a smaller range of potential rates than federal taxes, significant over-withholding or under-withholding is much less common. If you’re curious about state bonus withholding rules where you live, check with your state’s department of revenue.

How bonuses are taxed for Social Security

Social Security tax comes out of all your wages-including your bonus. So, as with your regular paycheck, 6.2 percent of your bonus will go toward Social Security. This is in addition to your federal tax withholding. Social Security tax is assessed only on the first $184,500 of wages in 2026.

How bonuses are taxed for Medicare

Similar to Social Security, your Medicare tax is withheld from all of your wages, including your base wages and any bonuses. That means 1.45 percent of your bonus will go toward Medicare. High earners are also subject to additional Medicare tax withholding of 0.9 percent, once wages for the year exceed $200,000. There is no income cap on assessment of Medicare taxes.

How to minimize taxes on bonuses

While the IRS is going to get its fair share of your bonus, certain strategies can help lower your overall tax burden, including these:

Contribute to tax-advantaged accounts

You can reduce your taxable income for the year by contributing funds to a 401(k), IRA or HSA. Depending on your income, these contributions may move you into a lower tax bracket and reduce how much you owe in federal taxes. But it’s important to remember that these accounts all have annual contribution limits, regardless of whether or not you get a bonus. Overfunding a retirement account can lead to penalties.

Bonus deferral

Consider asking your employer to defer your bonus to the following year. This might make sense if you’re expecting to make less money in the coming year. But it’s important to keep in mind that if your employer cannot pay the bonus at that time, you could lose it.

Itemize deductions

Choosing to spend your bonus on certain expenses could also lower your tax liability. Most people take the standard deduction, but if you’re already planning to spend more money on tax-deductible expenses, you may find that itemizing saves you more. Mortgage interest, state and local taxes, and charitable donations are the most common itemized deductions.

What should you do with your bonus?

If you’ve already received a bonus or expect to receive one and are unsure about how it will impact your taxes, your Northwestern Mutual financial advisor can help you understand your options. On top of helping you lower your tax burden, they can also help you put your bonus to good use as you work toward your financial goals.

Northwestern Mutual and its financial representatives do not give legal or tax advice. Taxpayers should seek advice regarding their particular circumstances from an independent legal, accounting or tax adviser.