How Are Bonuses Taxed? Rates, How It Works in 2025 and 2026
How taxes on your bonus are withheld depends on whether your employer picks the percentage method or the aggregate method of calculating the tax.
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Key takeaways
Employers generally withhold taxes on bonuses at a 22% rate, with anything over $1 million withheld at 37%. This is called the percentage method.
Alternatively, employers can combine the bonus with your regular pay and withhold tax on the entire sum. This is called the aggregate method.
Earning a bonus can feel like a well-deserved reward. After all, who doesn't want a pat on the back, plus some extra cash? But when your paycheck hits, you might find yourself asking, “Wait, why are bonuses taxed so high?"
Here’s a guide to how taxes on bonuses work, the two methods employers can use to calculate withholding, and some tips to help reduce the tax sting.
How are bonuses taxed?
Just like your salary or wages, bonuses count as earned income for the year, which means they're taxed at the same ordinary income tax rates and brackets. When you file your annual tax return, you'll see your bonus added to your other earned income and reported in Box 1 of your W-2. If you've had enough tax withheld throughout the year, you may not have a tax bill. If you've withheld too much or too little, that might mean a tax refund or a bill.
The IRS treats a bonus as supplemental income, which means it may be taxed differently than your regular wages. Employers have two options:
Withhold taxes at a flat rate through the percentage method.
Use the more complex aggregate method, which combines your bonus with your regular paycheck and applies withholding to the total.
Bonus tax rate 2025 and 2026
In addition to federal withholding, you will likely pay Medicare and Social Security taxes (1.45% and 6.2%, respectively). Your employer may withhold local and state taxes on the bonus as well.
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How the bonus tax works
Percentage method for bonuses
Relatively easy for the employer.
Flat 22% could generate a surprise tax bill or tax overpayment for people not in the 22% tax bracket.
If you receive a bonus separately from your regular paycheck, your employer is probably using the percentage method to calculate how much tax to withhold on your bonus. Here's how that works:
The employer withholds 22% of your bonus for taxes if your bonus is under $1 million.
If your total bonuses are higher than $1 million, the employer withholds 22% of the first $1 million and 37% of any bonus dollars beyond that. The IRS requires your employer to use the percentage method if the bonus is over $1 million.
Example
Example 1 | |
Ryan receives a $2,000 bonus. The employer withholds 22%, or $440, for federal income taxes. | $2,000 x 0.22 = $440. |
Example 2 | |
Julia receives a $1.5 million bonus this year. The employer withholds 22% of the first $1 million and 37% of the remaining $500,000, resulting in $405,000 withheld for federal income taxes. | $1,000,000 x 0.22 = $220,000 $500,000 x 0.37 = $185,000 $220,000 + $185,000 = $405,000 |
Advantages of the percentage method
The benefit of this percentage method is that it's relatively easy for the employer, so you'll often see taxes withheld this way on bonuses.
Disadvantages of the percentage method
The disadvantage of this method is that most people's effective tax rate is not 22%. If you're in a higher tax bracket, there's a chance that not enough of your bonus was withheld for taxes, which can lead to a surprise tax bill at the end of the year. On the other hand, if you're in a lower federal tax bracket, your bonus might get taxed at a higher rate than your regular income. That means more of your bonus will be withheld, which might result in a tax refund when you file.
Aggregate method for bonuses
Less likely to cause surprise tax bill or tax overpayment.
Less convenient for the employer.
Employers often use the aggregate method, or wage bracket method, when they lump bonuses in with regular wages into one paycheck. Here's how that works:
Your bonus and your regular income/wages arrive in one paycheck.
Your payroll department will withhold taxes on the entire aggregated payment at the same rate. That withholding rate depends on your filing status and the information you provided on your W-4.
For example, Michael’s filing status is single. His regular biweekly wages are $2,000. During this pay period, he also received a $550 bonus, which his employer added to his regular income. According to the IRS' wage bracket withholding table, Michael's $2,550 paycheck triggers a standard withholding of $236.
Advantages of the aggregate method
While it's not perfect, the aggregate method has a better chance of ensuring that you're withholding enough to cover your tax liability. Translation: There’s a smaller chance of a surprise tax bill because of your bonus.
Disadvantages of the aggregate method
It requires more work for the employer to calculate — and it's still possible to withhold too much, which could mean a bigger bite out of your paycheck than necessary. But, on the bright side, it gives you a better chance of having an accurate withholding for the year, or possibly a refund.
5.0
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How to minimize the tax impact of a bonus
1. Review your W-4
Because bonuses can occur at any point during the year, they get added to your salary piecemeal. And that can push a portion of your income into a higher tax bracket, increasing your tax liability.
Before or after your bonus is paid out, it could be worth doing a little maintenance on your W-4 form to adjust your withholdings. Figuring how much to withhold can be tricky, but our W-4 calculator can help you understand whether you're on track to owe taxes, get a refund or zero out your tax liability.
2. Make sure your bonus is actually taxable
Make sure that the bonus you're getting is actually ... a bonus. The IRS has rules about what it considers taxable. Things such as occasional tickets for events, holiday gifts, money for meals while working overtime, flowers, books, and other intermittent low-value fringe benefits are generally considered nontaxable. But once your employer forks over cash, offers you a gift card or hands over a high-value gift, things get murkier. Check with a CPA or other tax professional if you're unsure about the tax implications of a gift or an award.
3. Use tax deductions
Tax deductions are one of the best-known ways to lower your taxable income and help you offset some of your tax liability. Most taxpayers take the standard deduction, but if your individual tax-deductible expenses — such as unreimbursed medical costs, donations or mortgage interest — add up to more than the standard deduction, itemizing may help you trim your taxable income and save on your tax bill.
4. Contribute to a tax-advantaged account
If you haven’t hit your yearly contribution limit on a tax-advantaged plan, such as a 401(k), a health savings account (HSA) or a traditional IRA, consider using your bonus toward a qualifying contribution. Because the money you put into these accounts is pretax, it can lower your taxable income while also putting your hard-earned paycheck toward a long-term savings goal.
5. Defer your bonus
Some people might also ask their employer to defer the bonus until the following year. Importantly, doing so does not eliminate the taxes you may owe — it merely defers the payment of those taxes until a later date. This strategy could make sense if:
You think your bonus will push a portion of your income into a higher tax bracket and you need extra time to save up for the taxes you might owe.
You think your total income next year will be lower than the current year, which might lower your tax liability.
Because this can be a tricky strategy to navigate, consider consulting a CPA or another tax professional to ensure it's the right call for your financial picture.