How Bonuses Are Taxed (and Why Everyone Gets It Wrong)

On the second Friday of March, a marketing director in Phoenix watched a $10,000 bonus land in her checking account and then watched $3,240 of it disappear into the withholding lines on her pay stub. Federal income tax, $2,200. Social Security and Medicare, $765. State income tax, $275. About 32 percent of the award was gone before she spent a dollar, and the stub made it look as though the government had claimed a third of it.

By the time she filed her 2026 return, the picture had rearranged itself. The $2,200 federal line was not her tax bill. It was a prepayment, computed by her employer at a flat 22 percent, and it had only a loose relationship to the rate at which her income would actually be taxed. Her salary placed her in the 24 percent bracket, so the bonus's true federal tax came to about $2,400. She owed the difference, plus a little more to the state.

This is the confusion that arrives with every bonus season. Millions of workers read the withholding line on a bonus check as a verdict, and every spring the verdict is revised, sometimes in their favor and sometimes not. This article separates the two ideas the pay stub conflates: withholding, an employer's estimate made at a flat 22 percent, and taxation, the marginal rate your income actually faces. It walks through a $10,000 example, explains the second method employers may use, and shows why the gap produces surprise bills and surprise refunds — and what to do about either.

Consider the same-size bonus paid to a retail manager in the same city, earning $52,000 a year. The same $2,200 was withheld from her check, but her true rate was 12 percent, and she collected roughly $1,000 back the following April. Same bonus, same withholding line, opposite endings.

The 22 percent rule

The Internal Revenue Service divides wages into two buckets: regular wages and supplemental wages. Bonuses, commissions, overtime, back pay, and prizes from an employer all fall into the second bucket. When an employer pays a bonus separately from a regular paycheck, it may withhold federal income tax from that check at a flat 22 percent, under the rules in Publication 15, the employer's tax guide, known as Circular E.

The flat rate is a withholding convention, not a tax rate. It sat at 25 percent for years before the Tax Cuts and Jobs Act lowered it to 22 percent in 2018, and it has stayed there since. Employers choose between two methods, which we will get to; most use the flat rate for separately paid bonuses because it is simple. If the bonus is paid together with regular wages in a single check, the tax is usually withheld at the regular rate instead, using the standard tables.

Two details sharpen the picture. First, the flat rate applies only to supplemental wages of $1 million or less in a calendar year; anything above that must be withheld at 37 percent. Second, a bonus is wages for every other purpose too. Social Security tax at 6.2 percent and Medicare tax at 1.45 percent are withheld from it just as from a paycheck, up to the Social Security wage base — about $176,000 in 2025. Medicare's 1.45 percent has no ceiling; an extra 0.9 percent applies above $200,000 of wages for single filers.

None of this is a special tax on bonuses. The IRS does not tax a bonus at a different rate from the rest of your income; it withholds at a different rate, and that distinction is where the confusion begins.

Withholding is not a tax bill

Work the $10,000 bonus with real numbers and the confusion resolves. A senior engineer in Austin earning $140,000 a year receives a $10,000 bonus in March, paid in a separate check, and her employer withholds $2,200 at the flat rate. At filing, her taxable income is about $135,000 after the standard deduction, which puts the top of her income stack in the 24 percent federal bracket. The bonus, stacked on top of her regular pay, is taxed at that marginal rate: 24 percent of $10,000 is $2,400. She was under-withheld by about $200, and the shortfall shows up on her return as a balance due.

The retail manager, at $52,000, lands in a different band. Her taxable income after the standard deduction comes to about $47,000, inside the 12 percent bracket. Her $10,000 bonus is taxed at 12 percent — $1,200 — but $2,200 was withheld. She overpaid by $1,000, which arrives as a refund or, more likely, as a slightly larger refund than she would otherwise have received.

The same bonus. The same 22 percent withholding. Opposite outcomes, and the difference was never the bonus itself — it was the bracket the bonus landed in.

The phrase that trips people up is "tax bracket." The brackets are marginal: each new dollar of income is taxed at the rate of the band it falls into, not at one rate applied to everything you earn. A bonus is simply income dropped on top of the stack, so it is taxed at the rate of whatever band it reaches. That is why the same $10,000 bonus can produce a federal tax of $1,200 for one person and $3,200 for another.

The aggregate method

Employers have a second tool: the aggregate method. Instead of withholding a flat 22 percent from the bonus, the employer adds it to a regular paycheck and withholds from the combined amount using the regular tables. For a small bonus, the two methods land close together; for a large one, they diverge sharply.

Take the $10,000 bonus added to a $5,000 biweekly paycheck. The tables treat that $15,000 check as typical pay and annualize it, as though the employee earned about $390,000 a year; withholding on that single check can reach $4,000 or more — roughly 27 percent of the check, applied to the entire $15,000, not just the bonus. The employee gets the difference back at filing, but the check itself looks punishing.

Publication 15 permits either method, and the employer decides. Most choose the flat 22 percent for separately paid bonuses because it is predictable; the aggregate method is common when the bonus rides along on a regular pay date. Employees generally do not get to pick, though they can blunt the effect with a W-4. Either way, the choice does not change the final tax — only the timing of when you pay it. The IRS's own guidance, in Publication 15 and in its Topic No. 404 on supplemental wages, makes the same point: withholding is an estimate of tax, not the tax itself.

The bracket-crossing myth

Every bonus season produces a cousin of the same myth: the fear that a bonus will push you into a higher tax bracket and raise the tax on every dollar you earned. The fear is unfounded, and it costs people real money when it keeps them from taking a bonus or from asking for a bigger one.

A bonus can push you across a bracket line. The higher rate applies only to the dollars above the line. Someone with taxable income of $100,000 who receives a $10,000 bonus in a year when the 24 percent bracket begins at about $106,000 pays 22 percent on the first $6,000 of the bonus and 24 percent on the remaining $4,000 — an average of roughly 22.8 percent. The income below the line is untouched; no dollar is taxed twice.

The myth has a practical cost. Workers sometimes decline overtime, a bonus, or side income to stay below a bracket line, and the math almost never supports it. Only the dollars above the line are taxed at the higher rate, and the difference between 22 and 24 percent on a few thousand dollars is a few hundred dollars at most.

The same logic explains why a December bonus is not a tax trap. The calendar does not change the brackets; what changes is the year in which the income is reported — and the surprise. A year-end bonus arrives after most of the year's withholding is already set, leaving little time to adjust, so any shortfall lands on the return as a bill.

Why some people owe and others get refunds

The pattern is predictable and follows the brackets. Anyone whose marginal rate exceeds 22 percent — single filers with taxable income above roughly $106,000, couples filing jointly above roughly $207,000 — is under-withheld on a flat-rate bonus, and the gap widens with income. In the 32 percent bracket, a $50,000 bonus leaves about $5,000 of federal tax uncollected by withholding; that money arrives as a bill the following April.

The underpayment rules add a wrinkle. If withholding falls short of your liability by a wide margin, the IRS can add an estimated-tax penalty — unless you paid at least 90 percent of the current year's tax through withholding, or 100 percent of the prior year's tax (110 percent if your adjusted gross income exceeds $150,000). These are the safe harbors, and they matter most in December, when a year-end bonus has already been paid and a W-4 change can still lift withholding on the final paychecks.

The over-withheld side is quieter, and it is the source of the spring refunds. People who work part of a year, change jobs in the middle of a bonus cycle, or earn less than expected collect refunds and assume the bonus was taxed at 22 percent. In fact it was taxed at their marginal rate; the refund is the difference. A refund is not a gift from the IRS. It is your own money returned without interest, which is why tax professionals treat a large refund as a planning error rather than a windfall.

"People read the withholding line as the verdict," said a certified public accountant in Columbus who prepares about 200 individual returns a year. "It is a prepayment, and for bonuses it is often a rough one. By the time the return is done, the number on the stub matters very little."

State rules add their own layer. California withholds 10.23 percent from bonuses and New York 9.62 percent, according to the states' tax agencies, so a bonus in California is withheld at roughly 40 percent combined — 22 percent federal, 10.23 percent state, and 7.65 percent for Social Security and Medicare — before a dollar reaches the bank. The final bill, as always, is a different and usually smaller number.

What the bonus stub actually shows

Strip a bonus check down to its lines and the structure is easy to read. Gross pay: $10,000. Federal income tax withheld: $2,200, at the flat 22 percent. Social Security: $620, at 6.2 percent. Medicare: $145, at 1.45 percent. State income tax: $275. Net deposit: $6,760.

Three things about those lines are worth knowing. The federal line is the only one that is an estimate — Social Security and Medicare are fixed percentages, and most state lines are flat or near-flat, so those amounts are close to final. The federal line is where the estimate lives, because income tax is progressive and your employer does not know, in March, what your full-year income will be.

Second, the stub does not tell you the bonus's tax rate. It tells you the withholding rate, and the two diverge whenever your marginal rate is not 22 percent — which, for roughly half of all tax filers, it is not.

Third, the year-to-date columns matter more than the current check. A bonus in March is part of the year's total, and the stub's year-to-date figures are what the IRS ultimately compares with your return.

How big bonuses actually are

None of this would matter to so many households if bonuses were rare. They are not. Roughly three-quarters of large employers award annual incentives, according to Willis Towers Watson, and the Bureau of Labor Statistics employer cost series puts bonus and incentive payments at about 1.5 percent of total compensation for private-industry workers — more among professional, technical, and managerial jobs.

Compensation consultants put the median annual incentive for exempt employees near 12 percent of base pay, but the range by industry is wide. The figures below are rough composites of PayScale and Willis Towers Watson survey data; individual awards vary with role, performance, and company results.

Typical annual bonus as a share of base pay, by industry. Rough composites of PayScale and Willis Towers Watson survey data; individual awards vary widely.

Industry	Typical bonus share of base pay
Banking and finance	20 to 50 percent, sometimes more
Technology	10 to 20 percent
Professional services	10 to 20 percent
Health care	2 to 8 percent
Manufacturing	3 to 8 percent
Retail and hospitality	Modest cash or gift awards, often under $1,000

A $10,000 bonus is a middle-class event, not a Wall Street one, which is why the confusion touches so many households. And it is seasonal: bonuses cluster in December and March, and the bills and refunds they produce arrive together each spring, when the prior year's returns are being filed.

What to check before and after bonus season

The useful question is not what rate a bonus is taxed at. It is whether your withholding is right.

Before a bonus arrives, run your numbers through the IRS Tax Withholding Estimator, which compares year-to-date withholding against your projected liability and reports whether you are on track. If you sit in the 24 percent bracket or above, plan on the flat 22 percent falling short and set the difference aside: about $200 per $10,000 of bonus at 24 percent, and $1,000 per $10,000 at 32 percent.

If you owe money two years in a row, adjust your W-4 rather than replaying the surprise. If you collect a large refund every spring, the same form can move that money into your regular paychecks instead. It is a free and legal way to change the timing of your own tax; the only wrong answer is to ignore it. The change takes effect within a pay period or two, quick enough to matter for a bonus that lands in December — and the form can be refiled at any time, after a new job, a second earner, or a side income. The people who owe after a bonus year are often the people who have not looked at it since they were hired.

After the bonus, the line that matters is not the bonus's own withholding but the year-to-date totals on the stub. They show whether the year's withholding is tracking the year's income — the only comparison the tax system cares about. The same annual-versus-monthly translation is what this site's salary calculators do for paychecks and job offers.

A few things are worth watching. The flat rate has been 22 percent since 2018 and is not scheduled to change, but the IRS updates Publication 15 every year, and the brackets it interacts with move with inflation; the 2026 bands already reflect that drift, with the 24 percent bracket for single filers starting roughly $3,000 higher than in 2025. States, meanwhile, keep flattening their own rates, slowly changing the combined withholding on bonuses.

The larger point is durable. The tax system does not single out bonuses; it withholds from them at a convenient flat rate and settles the difference at filing. The refund or the balance due is the moment the estimate meets the actual, and it happens every spring. The check in March is not the verdict. The return in April is — and it is a verdict you can shape in December, with a W-4 and a few minutes of arithmetic.