Nothing beats the feeling of getting a bonus. Whether it’s a reward for crushing your sales targets, a holiday gift from the company, or a signing bonus to seal the deal on a new job, that extra money always feels like a well-deserved win. But when payday arrives, the reality sets in quickly: the deposit in your bank account is noticeably smaller than the number you were promised.
If you’ve ever wondered, “Why is so much tax taken out of my bonus?” you’re not alone. The Internal Revenue Service (IRS) treats bonuses as supplemental wages, which means they’re subject to specific withholding rules that can make your bonus feel like it’s being taxed at a higher rate than your regular paycheck. The good news? Understanding how bonuses are taxed can help you plan smarter and potentially reduce your overall tax burden.
This guide breaks down everything you need to know about bonus taxation, from withholding methods to strategies that can help you keep more of what you’ve earned.
Looking for personalized advice to minimize taxes on your bonus? The team at ARQ Wealth is here to help. Call us at (480) 214-9572 for a free consultation on optimizing your tax strategy.
What Is a Bonus? Understanding Supplemental Wages
The IRS considers a bonus to be any payment made to an employee in addition to their regular wages. The IRS classifies bonuses as “supplemental wages,” a category that also includes commissions, overtime pay, severance pay, vacation allowances, back pay, and taxable fringe benefits. Because supplemental wages fall outside the scope of your regular paycheck, they’re subject to different withholding rules.
The short answer to “Do bonuses get taxed?” is yes. Bonuses are considered taxable income and must be reported on your tax return. However, the way taxes are withheld from your bonus can differ from how they’re withheld from your regular wages, which is why your bonus check might look lighter than expected.
Types of Bonuses (All Taxed the Same Way)
Employers offer bonuses for many reasons, but regardless of the type, all cash bonuses are taxed as supplemental wages under the same IRS rules. Common types of bonuses include:
- Performance Bonuses: Rewards for meeting or exceeding individual, team, or company goals.
- Holiday/Year-End Bonuses: Appreciation payments are typically given during the holiday season.
- Signing Bonuses: Incentives offered to attract new employees, especially in competitive industries.
- Retention Bonuses: Payments to encourage employees to stay during critical periods or projects.
- Referral Bonuses: Rewards for recommending candidates who become successful hires.
- Profit-Sharing Bonuses: Distributions based on the company’s financial performance.
Whether you receive a $500 holiday bonus or a $50,000 performance bonus, the IRS treats them the same way for tax purposes.
How Employers Withhold Taxes on Bonuses
When it comes to withholding federal income tax from your bonus, employers can choose between two IRS-approved methods.
The Percentage (Flat Rate) Method
The percentage method is the most straightforward approach and is commonly used when your bonus is paid separately from your regular paycheck.
Under this method, your employer withholds a flat 22% for federal income tax on bonuses up to $1 million. For any bonus amount exceeding $1 million in a calendar year, the withholding rate jumps to 37% of the excess amount.
Here’s an example: You receive a $10,000 bonus paid separately from your regular paycheck. Using the percentage method, your employer withholds 22%, or $2,200, for federal income tax. You’d receive $7,800 before other deductions like Social Security, Medicare, and state taxes.
The Aggregate Method
When your bonus is included in the same paycheck as your regular wages, employers typically use the aggregate method. With this approach, your employer combines your bonus and regular pay, then calculates withholding as if the combined amount were your typical paycheck for the period.
For example, if you normally earn $4,000 per pay period and receive a $6,000 bonus in the same check, your employer would calculate withholding as if you earned $10,000 that period. This can temporarily push you into a higher calculation method for withholding purposes, potentially resulting in more tax being taken out upfront.
Learn more: How to Reduce Your Taxable Income for High Earners: 10 Proven Strategies
Federal Bonus Tax Withholding Rates
Here are the current federal withholding rates for bonuses when using the percentage method:
| Bonus Amount | Federal Withholding Rate |
| Up to $1 million | 22% flat rate |
| Over $1 million | 37% on the excess |
Source: IRS Publication 15-T
Remember, these are withholding rates, not your actual tax rate. Your final tax liability is determined when you file your return based on your total income and tax bracket for the year. If too much was withheld, you’ll receive a refund. If too little was withheld, you’ll owe the difference.
Other Taxes That Apply to Bonuses
Federal income tax withholding is just one piece of the puzzle. Your bonus is also subject to:
- Social Security Tax: 6.2% on wages up to the wage base limit of $184,500
- Medicare Tax: 1.45% on all wages, plus an additional 0.9% for high earners (over $200,000 single or $250,000 married filing jointly)
- State Income Tax: Varies by state (some states, like Texas and Florida, have no state income tax)
- Local Taxes: May apply depending on where you live and work
When you add up federal withholding, FICA taxes (Social Security and Medicare), and state/local taxes, it’s easy to see why your bonus check can feel significantly smaller than the amount you were promised (while not a tax, 401(k) withholding can also apply, reducing your take-home amount).
Are Bonuses Taxed Differently Than Regular Pay?
This is one of the most common misconceptions about bonus taxation. Let’s clear it up:
- Withholding: Yes, bonuses are withheld differently. The 22% flat rate (or aggregate method) often differs from the withholding rate on your regular wages based on your W-4.
- Final tax liability: No, bonuses are not taxed at a special “bonus tax rate.” When you file your return, bonus income is combined with your regular income and taxed at your ordinary marginal tax rate.
Higher withholding does not mean higher taxes. Withholding is simply an estimate of what you’ll owe. If your employer withholds more than necessary, you’ll get that money back as a refund when you file. If they withhold too little, you’ll owe the difference.
5 Strategies to Reduce Taxes
While you can’t avoid paying taxes on your bonus entirely, there are legitimate strategies to reduce your tax burden and keep more of what you’ve earned.
Contribute to a 401(k) or Traditional IRA
One of the most effective ways to reduce taxes on a bonus is to direct some or all of it into a tax-deferred retirement account, like a traditional 401(k) or traditional IRA, which reduces your taxable income for the year.
For 2026, you can contribute up to $24,500 to a 401(k), with an additional $8,000 catch-up contribution if you’re 50 or older (or $11,250 if you’re 60-63). IRA contributions are limited to $7,500 ($8,600 if 50+). Some employers even allow you to direct a specific percentage of your bonus into your 401(k) automatically.
Contributing to a 401(k) or IRA works well with the 3-Bucket Retirement Strategy.
Fund a Health Savings Account (HSA)
If you’re enrolled in a high-deductible health plan, contributing to an HSA offers a triple tax advantage: contributions are tax-deductible, growth is tax-free, and withdrawals for qualified medical expenses are also tax-free.
For 2026, you can contribute up to $4,400 for individual coverage or $8,750 for family coverage. Using bonus money to fund your HSA reduces your taxable income while building a valuable healthcare safety net.
Defer Your Bonus to the Next Year
If you expect your income to be lower next year, like if you’re planning to retire, go part-time, or take a sabbatical, you may benefit from asking your employer to delay your bonus until January. This pushes the tax liability into a year when you might be in a lower tax bracket. Your employer may say no, but it’s worth asking if your circumstances make this strategy worthwhile.
Request a Separate Bonus Check
If your employer typically combines bonuses with regular paychecks (using the aggregate method), you can ask them to issue your bonus as a separate payment. This allows the flat 22% withholding rate to be applied, which may result in more predictable withholding. This strategy is particularly helpful if you’re in a tax bracket below 22% and want to minimize over-withholding.
Adjust Your W-4 Withholding
If you receive predictable bonuses as part of your compensation package, consider adjusting your W-4 to account for this additional income throughout the year. The IRS Tax Withholding Estimator can help you fine-tune your withholdings to avoid a large tax bill or an unnecessarily large refund.
ARQ Wealth Tip: If your bonus is a predictable part of your compensation, working with a financial advisor sooner rather than later can help you create a year-round tax strategy and avoid scrambling at the end of the year. Learn more about when you should hire a financial advisor.
What About Non-Cash Bonuses?
Not all bonuses come in the form of cash. If your employer rewards you with gift cards, vacations, stock options, or other non-cash benefits, these are generally considered taxable income. According to IRS Publication 15-B, cash equivalents like gift cards are treated the same as cash for tax purposes.
However, the IRS does allow certain “de minimis fringe benefits” to escape taxation. These are small, infrequent gifts with minimal value. Think: a holiday ham, a flower arrangement, or a company-branded mug. Employee achievement awards may also be excluded up to certain limits if they meet specific IRS criteria and aren’t cash or cash equivalents.
Common Bonus Tax Mistakes to Avoid
Even savvy earners can stumble when it comes to bonus taxation. Here are common pitfalls to watch out for:
- Assuming Your Bonus is Taxed at 40%: Withholding isn’t the same as your actual tax rate. The 22% federal withholding, combined with FICA and state taxes, can make it seem like you’re losing 40% or more, but your final liability depends on your total income and tax bracket.
- Not Adjusting Your W-4: A large bonus can push you into a higher tax bracket, potentially leading to underpayment if your regular withholdings don’t account for it.
- Forgetting About State and Local Taxes: Federal withholding is just one piece of the puzzle. Depending on where you live, state and local taxes can take a significant additional bite.
- Missing Retirement Contribution Opportunities: Failing to direct bonus income toward tax-advantaged accounts means missing out on valuable tax savings.
- Spending the Entire Bonus: If your bonus was under-withheld, you may owe additional taxes when you file. Set aside a portion of any bonus to cover potential tax liability.
Real-World Example: How Bonus Taxes Work in Practice
Let’s walk through a practical example to illustrate how bonus taxation works.
Example: Sarah’s $15,000 Year-End Bonus
Sarah earns $85,000 annually and receives a $15,000 performance bonus paid separately from her regular paycheck. Her employer uses the percentage method for withholding.
| Tax Type | Amount Withheld |
| Federal income tax (22%) | $3,300 |
| Social Security (6.2%) | $930 |
| Medicare (1.45%) | $217.50 |
| State income tax (assume 5%) | $750 |
| Total Withheld | $5,197.50 |
| Take-Home Amount | $9,802.50 |
With a total income of $100,000 ($85,000 salary + $15,000 bonus), Sarah falls into the 22% federal tax bracket. In this case, the 22% withholding rate is accurate to her actual tax liability, so she shouldn’t expect a significant refund or balance due related to the bonus when she files. However, if Sarah were in the 12% bracket, she’d get some of that withholding back as a refund.
How Bonuses Are Reported on Your Tax Return
When tax time rolls around, your bonus won’t appear as a separate line item on your return. Instead, it’s included in Box 1 of your W-2 under “Wages, Tips, Other Compensation,” combined with all your other wages from that employer.
Your final tax liability is calculated based on your total income and applicable deductions. If the combined withholding from your regular pay and bonus exceeded your actual tax owed, you’ll receive a refund. If the withholding fell short, you’ll owe the balance.
Optimize Your Bonus Tax Strategy With ARQ Wealth
Understanding how bonuses are taxed is the first step toward making smarter financial decisions. Yes, your bonus will be taxed. But with the right planning, you can minimize the impact and keep more of your hard-earned money working for you.
At ARQ Wealth, we help clients develop comprehensive tax strategies tailored to their unique situations. Our fiduciary advisors can help you analyze your compensation (including bonuses), identify tax-saving opportunities, and implement strategies that align with your broader financial goals.
Schedule a free consultation with ARQ Wealth today or call us at (480) 214-9572 to develop a tax strategy that aims to keep more of your bonus in your pocket.