How are bonuses taxed? A complete guide for employers and employees

You’ve just run payroll, and your newest sales superstar can’t wait to get that first performance bonus. A new car? A trip to Paris? The possibilities are endless. Until payday arrives and the amount doesn’t quite live up to the fantasy—or the headline. You know that the bonus didn’t shrink; it’s just that taxes took their share before the direct deposit went out. But that won’t necessarily cut it with an employee wondering “where the rest of it went.”

The IRS taxes bonuses differently from regular wages, and understanding how they’re handled helps everyone. Employees can plan without surprises, and employers can stay compliant while communicating clearly. This guide breaks down the two accepted methods for withholding taxes on bonuses, spells out what impacts take-home pay, and walks you through setting expectations from the start.

What is a bonus?

A bonus is an additional payment on top of an employee’s regular salary or wages. It’s an employer’s way of saying, “Nice work,” only with cash instead of words. 

You can use a bonus to:

• Recognize exceptional performance

• Celebrate milestones

• Motivate your team to hit strategic goals

• Attract or retain top talent

While most bonuses take the form of cash added to a regular paycheck, they can also look like stock options, profit-sharing agreements, or even gift cards with a cash value. The IRS counts it all as “supplemental wages,” compensation that falls outside an employee’s standard pay. That category also includes other extras like commissions, severance, overtime, and tips, all of which follow special withholding rules. 

The catch? Bonuses are calculated and announced in gross pay, so the number your team hears isn’t the same as their take-home pay. The gross pay vs. net pay distinction can feel especially sharp if you don’t communicate clearly.

Types of bonuses

Not all bonuses send the same message. Some reward a job well done, others aim to keep you around a little longer, and a few are just seasonal cheer in cash form. According to recent compensation survey data, formal annual bonus plans are the most common, but knowing the different types can help you understand how they fit into total compensation—and how to best support your strategic goals.

Performance bonuses

Performance bonuses are awarded when an employee meets or exceeds specific targets, usually tied to individual, team, or company outcomes.

Example: Jamie hits every quarterly sales goal and receives a $4,000 performance bonus in December.

Holiday bonuses

Holiday bonuses typically land in your bank account at the end of the year as a gesture of appreciation and goodwill. 

Example: Casey receives a $750 holiday bonus along with their December paycheck.

Retention bonuses

Designed to keep an employee around through a key period or project, retention bonuses often come with strings attached.

Example: Helix Systems offers Morgan a $25,000 bonus if they stick with the company through a two-year software rollout. 

Signing bonuses

Companies can use signing bonuses to attract new hires, especially in competitive job markets or for hard-to-fill roles. 

Example: Big Corp. worries Taylor, its top candidate, might accept an offer from a competitor. To sweeten the total compensation package, the company adds a $5,000 signing bonus. 

Profit-sharing bonuses

Companies that reward employees with a share of the profit when the business meets certain financial targets often use scheduled bonuses to pay out. 

Example: Alex received a $1,500 profit-sharing bonus after the company surpassed its annual revenue target.

Referral bonuses

When employees recommend a successful new hire, the employer might issue a referral bonus as a reward.

Example: Riley referred a friend to an open position with Acme Corp. Once the friend passes the probation period, Riley earns a referral bonus of $500.

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How is a bonus taxed?

A bonus can be a great way to boost an employee’s income, but it’s worth taking time to manage expectations. The amount announced isn’t always the same as what shows up in their bank account after taxes and withholdings, which can lead to questions like,  “Are bonuses taxed differently?” 

In short, yes. The IRS treats bonus pay as supplemental income with its own set of withholding rules. Federal, state, and local agencies can also take a share, and pre-tax deductions can also play a role. Here’s who has a claim to part of a bonus check and why: 

Bonuses are considered supplemental wages

The IRS considers bonuses supplemental income, which means they follow different withholding rules than regular wages. This category also covers other forms of extra pay, like commissions, retention bonuses, and cash payouts from long-term incentive plans when they vest.

The flat percentage method (currently 22%)

This is the “no surprises” approach. When you receive a bonus separately from your regular wages, the percentage method applies a flat rate of 22% to the bonus amount. It’s simple and straightforward to calculate, but it may be higher or lower than the employee’s actual tax bracket. 

The aggregate method (regular tax bracket)

The aggregate method adds bonus pay to your paycheck for the period, which means your employer calculates withholding using the IRS’s tax tables. If the total bumps you into a higher tax bracket for that cycle, the tax withholding might look steeper, but it may also be closer to what you’ll actually owe for the year.

State and local taxes may also apply

Many states, as well as some cities, levy taxes on bonuses. Rates vary, so any employee in Manhattan may see more withheld than one in Memphis. (New York applies both state and city taxes to income, while Tennessee doesn’t tax wages at the state level.) 

Other withholdings still apply

Bonuses are subject to Social Security tax of up to 6.2% and Medicare tax of 1.45% (with an extra 0.9% for certain high earners). Benefit contributions, such as retirement plans or health insurance premiums, can also be deducted from bonus pay. 

Large bonuses may be subject to higher rates

If your total supplemental wages exceed $1 million in a calendar year, the IRS requires that any amount over that threshold be taxed at 37%. 

If an employee receives a stock grant worth $1 million and a performance bonus of $50,000, for example, the stock grant would be taxed based on standard bonus withholding rules, and the performance bonus at 37%.

Net pay may look lower than expected

All these layers of withholding can make the bonus look more modest in your employee’s bank account than you expected. The good news is that withholding is just an estimate. If you withhold more up front, the employee can reclaim the extra payments as part of their tax refund.

Flat vs. aggregate bonus tax withholding

The IRS gives companies two approved ways to handle tax withholding for bonus payments, and the method an employer uses directly affects what employees see on the bonus check. 

The flat rate method keeps things clean and consistent at 22%. It’s a good choice for one-off payouts or payments processed separately from the employee’s main paycheck. The aggregate method folds the bonus into regular wages and uses the IRS’s withholding tables to determine how much your employer should deduct based on tax bracket and W-4 settings, which can mean a more accurate pay cycle. 

Whether your employer applies a flat percentage or rolls your bonus into your salary, it’s important to note that your overall tax liability won’t change. The IRS works out how much federal income tax you owe based on your annual earnings, so if the aggregate method leads to over-withholding, you can claim back the difference as a tax refund. Put another way, you won’t pay more in taxes than someone whose bonus is taxed based on the percentage method; you’re just “lending” the extra to the IRS until tax season rolls around.

Flat-rate method (22%)

Taylor, a payroll manager for Red Dot Consulting, is processing a $7,500 bonus for Morgan. Since the employer plans to issue it as a separate bonus check, Taylor uses the flat-rate method. 

The IRS rate for supplemental income is 22%, so Taylor withholds $1,650 for federal income tax. (The 22% applies to the FIT taxable wages portion of the bonus, which may differ from the gross bonus if any pre-tax deductions apply.) Next, Taylor applies Social Security tax at 6.2% and Medicare tax at 1.45%. Because Morgan lives in Wisconsin, Taylor also needs to withhold a 5% state income tax.

In total, Taylor ends up withholding a total of $2,598.75, which means Morgan’s bonus pay comes to $4,901.25.

Aggregate method

A few months later, Taylor processes another $7,500 bonus for another employee, Casey. Because the bonus wasn’t approved until just before the regular payroll run, Red Dot decides to include it with Casey’s regular paycheck using the aggregate method.

Casey’s usual gross pay for the period is $3,000, so adding the bonus brings the total to $10,500 for the pay cycle. Based on the IRS tables for this pay frequency, the combined total falls into a higher tax bracket, and Taylor ends up withholding at the 28% federal rate on the bonus portion. Casey also happens to live in Wisconsin, so the same FICA taxes and state taxes apply.

Taylor withholds a total of $3,048.75 under the aggregate method, and Casey receives $4,451.25 in bonus pay before any other deductions. 

By year’s end, both Casey and Morgan are in the same bracket with identical federal income tax liability. The extra $450 Taylor withheld under the aggregate method comes back to Casey in the form of a tax refund, bringing the net after-tax bonus to $4,901.25, just like Morgan’s.

Bonus tax examples

Seeing a few examples can make it easier to understand how bonus taxes work, and why a paycheck might look different depending on how the employer handles withholding. 

Alex at Acme Co. earned a $5,000 bonus for closing a big account. The company uses the percentage method, which means it applies a flat 22% federal income tax rate right away and withholds $1,100. The remaining $3,900 is also subject to Social Security tax at a rate of 6.2% and Medicare tax at a rate of 1.45%, as well as state taxes. Alex misses that extra $1,100, but not too much. After all, they knew exactly how much Acme Co. would withhold from the start. 

Jordan also receives a $5,000 bonus, but their employer, Widgets Co., uses the aggregate method. When the bonus is added to Jordan’s regular paycheck, the total amount pushes Jordan into a higher tax bracket for the pay period. The result? 28% withheld for regular taxes, plus the same payroll taxes for Social Security and Medicare. That means less in Jordan’s bank account immediately, but they might have a chance to claim some of it back as a tax refund when filing their tax return. 

For both Jordan and Alex, the total tax liability for the year gets calculated at tax time. Withholding only affects when the money gets paid—not the amount owed. A tool like Rippling can make it easier for employees to see a clear breakdown of how federal income tax, state tax, and payroll taxes affect a bonus check in real-time, which means fewer surprises when the deposit hits.

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Tips to reduce the impact of taxes on bonuses

While employees can’t avoid paying taxes on bonuses, there are ways to finesse when and how much gets withheld so the impact feels smaller. These strategies don’t change overall tax liability, but they do help with cash flow and planning. 

1. Contribute your bonus to a retirement account

If your employer offers a 401(k) or similar plan, you may be able to direct part or all of your bonus pay into it. This reduces your current taxable income and can lower the federal income tax withheld on the bonus check. This offers the advantage of further growing your money and defers any taxes owed until retirement. 

2. Request a bonus deferral to the following tax year

If your employer uses the aggregate method, deferring your bonus for a year when you expect to enter a lower tax bracket can help reduce your overall tax liability. The IRS still taxes it as income, but by shifting the timing, you may be able to take advantage of a lower tax rate.

3. Adjust your W-4 withholding in advance

If you know a bonus payment is coming, consider updating your W-4 to withhold less from your regular pay for the same year. While this doesn’t technically impact the tax rate on your bonus, it can help offset the extra federal withholding, especially if your employer uses the aggregate method. Just be careful that you don’t adjust so much that you end up owing money at tax time.

4. Consider the timing of other income

Large supplemental income like commissions, stock payouts, or overtime can combine with your bonus to temporarily push you into a higher tax bracket. Where possible, space these payments across different years or pay periods. The total taxes owed won’t change much, but the tax withheld might be lower, which means a smaller bite out of your paycheck.

How Rippling helps automate payroll and bonus tax reporting

Bonus runs can be tricky. Different withholding methods, extra approvals, and potential questions about the final payout. Rippling’s payroll software helps you keep everything clean, accurate, and easy to track from start to finish.

Rippling offers a seamless data pipeline that consolidates all your payroll functions on a single platform for a globally compliant pay run. Combined with Rippling’s suite of benefits management and time and attendance tools, it streamlines the entire payroll process.

Designed for a high degree of flexibility, Rippling also allows you to customize your payroll workflows, approvals, and reporting at a granular level. Role-based approvals and reporting also protect the confidentiality of your data internally.

With Rippling you can:

• Integrate payroll and tax compliance

• Automatically apply the percentage or aggregate method to bonus payments

• Provide team members with real-time previews of bonus take-home pay

• Sync payroll to HR and performance systems to automate bonus triggers

• Generate audit-ready reports and W-2s in a few clicks

How are bonuses taxed FAQs

How much is a $100,000 bonus taxed?

A $100,000 bonus would typically have federal income tax withheld at a flat rate of 22% based on the percentage method, which means your employer takes out $22,000 upfront. You’d also pay Social Security tax of 6.2%, Medicare tax of 1.45% and any applicable state tax. If your employer combines your bonus and your base pay using the aggregate method, the withholding could be higher depending on your tax bracket.

How do bonuses get taxed?

For most people, the federal income tax on a bonus is withheld at a flat rate of 22% based on the percentage method. If your employer uses the aggregate method, however, your bonus pay is added to your regular wages for the period and taxed at the normal tax rate. This could be higher or lower than 22%, depending on your tax bracket. In both cases, your employer’s withholding is an estimate. You’ll learn your actual tax liability when you file your return.

Why was so much tax taken out of my bonus?

Your bonus may have been taxed at a higher rate than what you’re used to because the IRS treats it like supplemental, not regular, income. Employers either withhold at a flat 22% rate or combine it with your regular paycheck under the aggregate method, which can make the total withholding seem larger. Remember, you’ll also pay state and local taxes and see deductions for Social Security and Medicare, just as you would with other income.