Employee bonuses are taxed just like regular pay.
The IRS sees them as income, so you’ll owe taxes on any bonus you get. But the way taxes are taken out of bonuses is a bit different from your normal paycheck.
Bonuses fall into a group called “supplemental wages.” This group also includes things like:
- Overtime pay
- Commissions
- Sick leave payouts
- Severance pay
- Tips
The tax rate on bonuses under $1 million is usually 22%. For bigger bonuses, the rate jumps to 37% for any amount over $1 million. Your employer will likely take these taxes out before you get your bonus.
How much tax gets taken out of bonuses?
The government takes a big chunk of bonus money. Companies often use a special tax rate when they give out bonuses. This rate is 22% for most bonuses. That means if you get a $1,000 bonus, $220 goes straight to taxes.
For really big bonuses over $1 million, the tax rate jumps up. The first million dollars gets taxed at 22%. Anything above that gets taxed at 37%.
Bonuses also get taxed for Social Security, Medicare, and state taxes. The exact amount depends on where you live and work.
These bonus tax rates are just for withholding. They don’t decide how much tax you’ll actually owe at the end of the year. That gets figured out when you file your tax return.
FICA taxes on bonuses
FICA taxes also apply to bonuses. These include Social Security and Medicare taxes. In 2024:
- Social Security tax: 6.2% on the first $168,600 of pay
- Medicare tax: 1.45% on all pay
- Extra Medicare tax: 0.9% on pay over $200,000
These taxes are taken out of both regular pay and bonuses.
State taxes on bonuses
Most states tax bonuses too. The rates can be different from regular income tax rates. Some examples:
- California: 6.6% on most bonuses, 10.23% on stock options
- Maryland: 5.75% plus local tax rate
State bonus tax rules can be tricky. They change from state to state. It’s smart to check your state’s rules or ask a tax pro for help.
Bonus Tax and the Flat Rate Approach
The flat rate method is a simple way to handle bonus tax deductions. It’s used when bonuses are given separately from regular pay. The IRS sets a 22% flat rate for most bonuses. For really big bonuses over $1 million, the rate jumps to 37% for the amount above $1 million.
Here’s a quick example:
- Bonus: $5,000
- Federal tax withheld: $5,000 x 22% = $1,100
Don’t forget about other taxes:
- Social Security: 6.2%
- Medicare: 1.45%
- State taxes: Varies by state
Let’s say you’re in Colorado with a 4.63% state tax rate:
- State tax: $5,000 x 4.63% = $231.50
Total deductions: $1,100 (federal) + $310 (Social Security) + $72.50 (Medicare) + $231.50 (state) = $1,714
Take-home bonus: $5,000 – $1,714 = $3,286
Remember, you can’t choose a different rate. The 22% (or 37% for huge bonuses) is set by the IRS.
Bonus Tax and the Add-It-All-Up Approach
The add-it-all-up method (officially called the aggregate method) is a bit trickier. It’s used when:
- Bonuses are mixed in with regular pay
- No taxes were taken out of regular pay recently
- The employer decides to use this method
Here’s how it works:
- Add the bonus to the regular pay
- Figure out the tax on the total amount
- Subtract the tax already taken from regular pay
Let’s look at an example:
- Monthly salary: $4,000
- Bonus: $1,000
- Total: $5,000
Using tax tables, let’s say the withholding on $5,000 is $650. If $400 was already withheld from the regular pay, you’d withhold an extra $250 from the bonus.
Social Security, Medicare, and state taxes are calculated the same way as the flat rate method.
Using the Add-It-All-Up Method Without Regular Pay
Sometimes bonuses are given separately from regular paychecks. Here’s what to do:
- Add the bonus to the last paycheck or the next one
- Calculate tax on the total
- Subtract tax already taken out or planned for the regular pay
For example:
- Last month’s pay: $4,000
- This month’s bonus: $1,000
- Total: $5,000
Calculate tax on $5,000, then subtract what was already taken out of the $4,000 paycheck.
If there were other special payments that month, add them all up and do the math on the grand total.
