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Bonus Tax Rate: How Bonuses Are Taxed

Jan 13, 2021 3 min read Kevin Johnston

Key takeaways

  • The tax on your bonus depends on how your employer calculates the payment.
  • If your bonus is included with your regular paycheck, you may receive less of it.
  • It sounds crazy, but consider refusing or postponing a bonus.


Congratulations — your boss says you'll get a hefty bonus. It's a big one (say $10,000), so you can finally add that room to your house (if you can believe your contractor). But wait—you won’t actually receive the full amount…thanks to the IRS’ bonus tax rate.

Let’s look at the ways the IRS figures tax rate on bonuses.



How are bonuses taxed?

Just like a portion of your paycheck goes toward prepaying your taxes, the same process occurs with bonuses. However, since they’re are not ordinarily part of your income, bonuses are designated as supplemental income, instead of just being added to your paycheck and taxed the same way. According to the IRS, any supplemental wages should have federal income tax withheld at a 22% flat rate.


What is supplemental income?

The IRS has a category called "supplemental wages" that includes severance pay, back wages, vacation payments, moving costs, overtime, taxable benefits, commissions and bonuses.

The reason for categorizing income is so it can be treated differently for income tax-withholding purposes. The IRS and your employer treat bonuses in two different ways:

  1. 1. The percentage method

    The IRS says all supplemental wages should have federal income tax withheld at a rate of 22%. So for a $10,000 bonus, you'd have $2,200 withheld in federal income taxes and receive $7,800.

    This is the simplest method, so chances are your employer most likely will withhold the percentage from your bonus. Fortunately, it's also the most beneficial to you.

  2. 2. The aggregate method

    When your bonus is included in your regular paycheck, things get complicated. First, your employer calculates the normal withholding amount for your entire paycheck. Then it subtracts what was withheld from your last paycheck from your current withholding. The rest is withheld from your bonus.

    This results in a higher rate of withholding on your bonus; indeed, you might receive less money simply because of the method used to calculate withholding.

Bonuses over $1 million are taxed differently

Your bonus amount below $1 million must have 22% withheld; anything above $1 million, however, is subject to withholding at 37%.

Whichever method your employer uses, your final income tax will be based on your total taxable income for the year when you file your federal return. You'll receive credit for all the income tax withheld from your pay, including your bonus.


How to keep more of your bonus

Your best strategy is to ask for the bonus in a separate check from your salary. Then ask your employer to use the IRS "supplemental wages rate" of 22%. The employer will be in compliance with tax law, and you'll get more money.

You could also request that the bonus be given to you after the end of the year. This can be advantageous if you think you'll make less money next year, and your tax rate could be lower. If your employers uses the aggregate method on your bonus, you'll still have less tax withheld if you're in a lower tax bracket.


What you can do next

Ask your employer or benefits department which method it uses for withholding on bonuses. If you have a choice, request the percentage method.

Calculate your tax bracket with the bonus included. If the bonus would push you into a higher bracket, figure out how much more tax that would cause to be withheld on your regular income. Then request that your bonus be split into two portions. Get half before the end of the year and half after the end of the year. This can keep you out of the higher withholding bracket.


Prudential Financial doesn't provide tax or legal advice. Please consult your tax and legal advisors for advice concerning your circumstances.




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