How bonuses are taxed
Bonuses are supplemental wages. When your employer pays one separately from your regular pay, most use the IRS percentage method: a flat 22% federal withholding, or 37% on any supplemental pay above $1 million in a year. Social Security and Medicare come out as usual, and states have their own rules.
Example: a $5,000 bonus has $1,100 of federal withholding, $310 of Social Security, $72.50 of Medicare and, at a 4% state rate, $200 of state tax. You receive $3,317.50, with 33.65% withheld.
Withholding isn't your final tax
A bonus isn't taxed at a special rate. At tax time it's added to your other income and taxed at your normal rates. If your top bracket is 12%, the 22% withheld is more than you owe and the difference comes back in your refund; if you're in the 32% bracket or higher, you may owe more.
Some employers use the aggregate method instead, adding the bonus to a regular paycheck and withholding as if you earned that much every pay period, which can withhold more at first. Putting part of a bonus into your 401(k) lowers the income tax withheld. See a regular paycheck with the paycheck calculator, or compare states in our take-home pay by state study.
Frequently asked questions
Why is my bonus taxed so much?
Usually because withholding is a flat 22% federal plus 7.65% for Social Security and Medicare and state tax, about 30% to 40% in total. It's withholding, not the final tax: you get back any excess when you file.
Is the bonus tax rate 22% or 40%?
The federal supplemental withholding rate is 22% (37% above $1 million). The 40% figure people mention is federal, Social Security, Medicare and state withholding added together.
Can I avoid tax on a bonus?
You can lower it by contributing the bonus to a 401(k) or HSA through payroll, if your plan allows. The rest is taxable income.
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