Bonus tax is calculated differently from regular paycheck tax, and your employer has two methods to choose from

When you receive a bonus, your employer must withhold federal income tax, Social Security tax, and Medicare tax — but the calculation method differs from your regular salary. Your employer can use either the percentage method (withholding a flat percentage of the bonus) or the aggregate method (combining your bonus with regular pay and calculating tax on the total). The method your employer chooses affects how much tax comes out of your check. Most employers use the percentage method because it is simpler, but some use the aggregate method because it can result in lower withholding.

The amount withheld is not necessarily the amount you will owe when you file your tax return. Withholding is an estimate based on the information on your W-4 form. If your withholding is too high, you get a refund. If it is too low, you owe more when you file. Understanding how your employer calculates the withholding helps you predict what will land in your account and what you might owe later.

Key Takeaways

  • The percentage method withholds a flat 22 percent federal tax on bonuses under $1 million, or 37 percent on bonuses over $1 million, regardless of your tax bracket.
  • The aggregate method combines your bonus with your regular paycheck and calculates tax as if the total were your normal pay, which often results in lower withholding.
  • Withholding is not the same as what you owe — you may owe more or less when you file your return depending on your total income and tax situation.
  • Your employer decides which method to use, and you cannot request a specific method, but you can adjust your W-4 to change future withholding.
  • State and local taxes on bonuses follow different rules and vary by location, so your take-home amount depends partly on where you live.

The percentage method: flat withholding on the bonus amount

Under the percentage method, your employer withholds a fixed percentage of your bonus for federal income tax. For bonuses under $1 million in a calendar year, the rate is 22 percent. For bonuses over $1 million, the rate jumps to 37 percent on the amount above $1 million. This withholding is separate from your regular paycheck withholding and does not depend on your tax bracket or W-4 settings.

Example: You receive a $5,000 bonus. Your employer withholds 22 percent, which is $1,100 in federal income tax. You also owe Social Security tax (6.2 percent of the bonus, capped at the annual wage base) and Medicare tax (1.45 percent of the bonus). So the total withholding is roughly $1,100 + $310 + $73 = $1,483, leaving you with about $3,517.

The percentage method is straightforward for your employer, which is why it is the default. However, it does not account for your actual tax bracket. If you are in the 12 percent bracket, 22 percent withholding is too much. If you are in the 32 percent bracket, 22 percent is too little. You will reconcile the difference when you file your tax return.

The aggregate method: combining bonus with regular pay

Under the aggregate method, your employer adds your bonus to your regular paycheck (or to your year-to-date pay) and calculates federal income tax on the combined amount as if it were all regular salary. This method uses your actual tax bracket and W-4 settings, which often results in lower withholding than the percentage method.

Example: Your regular biweekly paycheck is $2,000, and you receive a $5,000 bonus in the same pay period. Your employer treats it as a $7,000 paycheck, calculates tax based on your bracket and W-4, and withholds accordingly. If your bracket is 12 percent, the withholding on the combined $7,000 might be $840, not the $1,100 the percentage method would take. You keep more money upfront, but you still owe the same total tax when you file — the difference is timing.

Some employers use a variation: they calculate tax on your year-to-date pay plus the bonus, then subtract what they already withheld from earlier paychecks. This prevents over-withholding if you received a large bonus late in the year. The result is often the most accurate withholding of the three approaches.

Social Security and Medicare tax on bonuses

Social Security tax and Medicare tax (together called FICA taxes) are withheld on bonuses the same way they are withheld on regular pay. Social Security tax is 6.2 percent of the bonus, but only up to the annual wage base limit (which changes each year — in 2024 it is $168,600). Medicare tax is 1.45 percent of the bonus with no cap. If you are a high earner, you also owe an additional 0.9 percent Medicare tax on income above a threshold ($200,000 for single filers).

These taxes are withheld automatically and do not change based on which method your employer uses for income tax. They are also not refundable — you cannot get them back on your tax return, even if you overpaid. The only exception is if you worked for multiple employers and your combined Social Security wages exceeded the annual base; in that case, you can claim a credit on your tax return.

How withholding differs from what you actually owe

Withholding is your employer's best guess at your tax liability, based on your W-4 form and the bonus amount. It is not your final tax bill. When you file your return, you report all your income for the year and calculate your actual tax. If the withholding was higher than your actual tax, you get a refund. If it was lower, you owe more.

The percentage method often over-withholds because it assumes a 22 percent tax rate regardless of your bracket. If you are in the 12 percent bracket, you will likely get a refund. If you are in the 35 percent bracket, you will likely owe more. The aggregate method is more likely to be accurate because it uses your actual bracket, but it is still an estimate.

Your total tax liability depends on your full-year income, filing status, deductions, and credits — not just the bonus. A large bonus might push you into a higher bracket, which affects tax on all your income, not just the bonus itself. This is why some people owe money at tax time even though they received a large bonus with withholding.

State and local tax on bonuses

Most states tax bonuses as ordinary income, using the same rates and brackets as regular wages. Your employer withholds state tax based on your state W-4 form. Some states have no income tax (like Texas, Florida, and Wyoming), so you owe nothing to the state. Others, like California and New York, have high rates that can significantly reduce your bonus.

Local taxes vary widely. Some cities and counties tax bonuses, some do not. Philadelphia, for example, taxes bonuses at the same rate as regular income. Other jurisdictions have no local income tax. Your employer should know your local tax obligation based on where you work or live, but it is worth checking your pay stub to see what was withheld.

State and local withholding is separate from federal withholding. A $5,000 bonus might have $1,100 in federal withholding, $400 in state withholding, and $50 in local withholding, for a total of $1,550 before Social Security and Medicare. The exact amount depends on your state, your bracket, and your local jurisdiction.

Adjusting your withholding if the bonus creates a problem

If you receive a large bonus and the withholding leaves you short of cash, or if you know you will owe money at tax time, you can adjust your W-4 form to increase withholding on future paychecks. You cannot change the withholding on a bonus that has already been processed, but you can tell your employer to withhold more from your regular paychecks for the rest of the year.

To adjust your withholding, fill out a new W-4 form and submit it to your payroll department. You can increase the amount withheld per paycheck, or you can claim fewer allowances (on the older W-4 form) to increase withholding. The IRS W-4 calculator on irs.gov can help you figure out what settings will get you close to your actual tax liability.

If you receive bonuses regularly, you might also ask your employer whether they use the percentage method or the aggregate method, and whether they would consider using the aggregate method if they currently use the percentage method. Some employers will switch methods if you request it, though they are not required to. Knowing the method in advance helps you plan.

Frequently Asked Questions

Will I owe money at tax time if my employer withheld 22 percent on my bonus?

Not necessarily. It depends on your total income and tax bracket for the year. If 22 percent is more than your actual tax rate, you will get a refund. If your bracket is higher than 22 percent, you will owe more. File your return to find out.

Can I ask my employer to use the aggregate method instead of the percentage method?

You can ask, but your employer is not required to switch. Most employers use the percentage method because it is simpler. If your employer agrees to use the aggregate method, it will explore to future bonuses, not retroactively.

Is the withholding on my bonus refundable?

Federal income tax withholding is refundable if you overpaid. Social Security and Medicare tax withholding are not refundable unless you worked for multiple employers and exceeded the Social Security wage base.

How do I know if my state taxes bonuses?

Check your pay stub to see if state tax was withheld. If you live in a state with no income tax (Texas, Florida, Wyoming, and others), no state tax will be withheld. Your employer should withhold based on your state of residence or work.

What if I received a bonus in December and now I owe money in January?

This is common if the withholding was too low for your bracket. You can adjust your W-4 for the next year to increase withholding on regular paychecks, or you can make an estimated tax payment to the IRS if you expect to owe a large amount.