How Bonuses Are Taxed: The Supplemental Wage Rate Explained

“They taxed my bonus at 50%!” is a common complaint during bonus season. The truth is less dramatic but still worth understanding: bonuses are not taxed at a higher rate — they are withheld differently. This guide explains the distinction and what you can do about it.

Key Takeaways

• Bonuses are ordinary income, taxed at your marginal rate — not a special 'bonus rate.'
• Employers typically withhold a flat 22% for federal tax (37% above $1 million).
• Withholding is not the same as your actual tax bill — you true up when you file.
• FICA taxes (Social Security and Medicare) also apply to bonus income.

Withholding vs. Actual Tax

There is a critical distinction between withholding (what your employer takes out of your paycheck) and your actual tax liability (what you owe when you file). Withholding is just an estimate. The IRS settles up the true amount when you file your return.

Your employer can withhold on bonuses using one of two IRS-approved methods:

Method 1: Flat Rate (Most Common)

The employer withholds a flat 22% for federal income tax on bonuses up to $1 million. For amounts over $1 million, the rate jumps to 37%.

This method is simple for payroll departments, which is why most employers use it. But 22% might not match your actual bracket.

Method 2: Aggregate Method

The employer combines your bonus with your regular pay for the pay period, calculates withholding on the total as if it were a single payment, then subtracts the withholding already calculated on your regular pay. This can result in higher withholding because the combined amount may push the calculation into a higher bracket — but again, this is only withholding, not your actual tax.

What Taxes Apply to Bonuses

Your bonus is subject to all the same taxes as your regular wages:

Tax	Rate	Notes
Federal income tax	10%–37% (your marginal rate)	Withheld at 22% flat or aggregate method
Social Security (OASDI)	6.2%	Up to the wage base ($176,100 for 2025, $183,000 for 2026 est.)
Medicare	1.45%	No cap; additional 0.9% above $200k single / $250k MFJ
State income tax	Varies	Your state’s supplemental wage rate

When people say their bonus was “taxed at 40%+,” they are adding federal withholding (22%) + FICA (7.65%) + state taxes (5-13% depending on the state). That is not a special bonus penalty — it is the same taxes that apply to all earned income. For a detailed breakdown of every line item on your paycheck, see understanding your paycheck tax deductions.

Will You Get a Refund (or Owe More)?

It depends on your marginal tax rate:

• If your marginal rate is under 22%: The 22% flat withholding was too much. You will get the difference back when you file. For example, if you are in the 12% bracket, you overpaid by 10% of the bonus.
• If your marginal rate is 22%: The withholding was exactly right.
• If your marginal rate is above 22%: The withholding was not enough. You may owe additional tax when you file or need to adjust your W-4.

To understand your marginal rate, see our guide on federal income tax brackets.

Strategies to Reduce Tax on Bonus Income

While you cannot change how your employer withholds, you can reduce the tax impact of bonus income:

1. Max out your 401(k). If your employer allows bonus deferrals, you can send all or part of your bonus directly into your 401(k). The 2026 limit is $24,500 (under 50) or $32,500 (50+). This reduces your taxable income dollar for dollar.

2. Contribute to an HSA. If you have a high-deductible health plan, an HSA contribution reduces your AGI by up to $4,400 (self-only) or $8,750 (family) for 2026.

3. Time your W-4 adjustments. If you know a large bonus is coming and you expect overwithholding, you can use the current W-4 to adjust your filing status, Step 2, and the extra withholding in Step 4(c), using the IRS Tax Withholding Estimator to dial in the right amounts. Be careful not to underwithhold for the full year.

4. Use an FSA. If open enrollment aligns with your bonus timing, a healthcare FSA lets you set aside up to $3,300 pre-tax for medical expenses.

5. Charitable giving. Donating appreciated stock or bunching charitable contributions in a bonus year can generate itemized deductions that offset the extra income. A donor-advised fund lets you bunch multiple years of giving into your high-income year.

6. Check your overall withholding. Use the federal withholding calculator or tax withholding estimator to make sure your total annual withholding is on track after the bonus.

The $1 Million Threshold

For bonuses exceeding $1 million in a calendar year, the IRS requires the flat rate method to use 37% on the portion above $1 million. This is the top marginal tax rate — so for most high earners, the withholding is close to accurate.

How sharper.tax Helps

sharper.tax analyzes your full tax picture, including bonus income, and calculates whether your withholding is on track or whether you are likely to owe (or receive a refund) at filing time. We also identify strategies like retirement contribution optimization and tax deductions that can offset the tax impact of bonus income. For more on the difference between what is withheld and what you actually owe, see our guide on effective tax rate formula. Sophisticated tax planning used to require a high-end CPA — we make it available for free.

Sources

• IRS Publication 15 (Circular E): Employer’s Tax Guide — Supplemental Wages
• IRS Topic 401: Wages and Salaries
• IRS Publication 505: Tax Withholding and Estimated Tax

The information above is educational and not tax advice.