Bonus Tax Withholding Explained: Why Bonuses Are Taxed So High

If you've ever gotten a bonus and been shocked at how much smaller it was than expected, you're not imagining things. Bonuses really do get withheld at a higher rate than your regular paycheck — but there's an important distinction between what's withheld and what you actually owe.

Why bonuses are withheld differently

The IRS classifies bonuses as "supplemental wages" — a category that also includes commissions, severance pay, and overtime paid separately from a regular check. Employers have two ways to withhold federal tax on supplemental wages:

1. The percentage method (most common) A flat 22% is withheld from bonuses up to $1 million in a calendar year, regardless of your actual tax bracket. Bonuses above $1 million are withheld at 37%.

2. The aggregate method Your employer combines the bonus with your regular paycheck for that pay period and withholds federal tax on the total as if it were one big paycheck at your normal rate. This can actually withhold more than the flat 22% if you're in a higher bracket, because the combined amount pushes more of that paycheck into higher withholding tables.

Most employers use the percentage method because it's simpler to administer — which is why a flat 22% (plus Social Security and Medicare) is the most common bonus withholding you'll see.

What's actually withheld from a $5,000 bonus

• Federal withholding (22% flat rate): −$1,100
• Social Security (6.2%): −$310
• Medicare (1.45%): −$72.50
• State tax: varies (0% in no-tax states, otherwise a percentage depending on your state's method)
• Take-home (no state tax): approximately $3,517.50

That's before any state tax, which — depending on your state — may also apply its own supplemental wage rate.

Withheld vs. owed: the part people miss

Here's the key thing: 22% withholding is not necessarily your actual tax rate on that money. If your total annual income puts you in the 12% bracket, you may have had too much withheld on the bonus — and get some of it back as part of your tax refund. If you're in the 32% bracket, 22% withholding is actually too little, and you may owe more when you file.

Your bonus isn't taxed at a special higher rate forever — the withholding is just an upfront estimate. Your actual tax liability is calculated once a year, when all your income (regular pay + bonuses + anything else) is combined and run through the real tax brackets.

How to estimate your real bonus tax rate

To get a sense of whether your bonus withholding matches your actual bracket, add your expected annual income (salary + bonus) and see which marginal bracket the bonus portion falls into. If it's below 22%, expect a refund adjustment. If it's above, consider setting aside the difference so you're not surprised at tax time.

For a quick, accurate estimate of what a bonus will actually add to your take-home pay this year, run the numbers through the PayGauge paycheck calculator.