When you receive a bonus from your employer, it’s natural to feel excited about the extra income. However, it’s crucial to understand how bonuses are taxed to avoid any surprises when you receive your paycheck or file your tax return. Bonus taxation can be complex, with different methods and rules applied depending on various factors.
Understanding the nuances of bonus taxation can help you better plan your finances and potentially maximize your earnings. In this comprehensive guide, we’ll explore the intricacies of how bonuses are taxed and discuss strategies to reduce your tax burden.
How Are Bonuses Taxed?
In general, bonuses are considered supplemental wages by the Internal Revenue Service (IRS). This classification means they are subject to different tax withholding rules than your regular salary. The primary methods used for taxing bonuses are the percentage method and the aggregate method. Each has its own implications for your take-home pay.
The Percentage Method: A Flat-Rate Approach
The percentage method is one of the most common approaches used by employers to withhold taxes on bonuses. Under this method, your employer applies a flat tax rate to your bonus, separate from your regular wages. As of 2025, the standard federal withholding rate for supplemental wages, including bonuses, is 22%.
Here’s how the percentage method works in practice:
- Your employer identifies the bonus amount.
- They apply the 22% flat rate to the bonus.
- The resulting amount is withheld for federal income tax.
For example, if you receive a $5,000 bonus:
- Federal income tax withholding: $5,000 x 22% = $1,100
- Your net bonus (before other deductions): $5,000 – $1,100 = $3,900
It’s important to note that this 22% withholding rate is not your final tax rate on the bonus. When you file your tax return, your bonus will be included in your total taxable income for the year, and you may owe more or receive a refund depending on your overall tax situation.
The Aggregate Method: Combining Bonus with Regular Income
The aggregate method takes a different approach to bonus taxation by combining your bonus with your regular wages for the pay period. This method can result in a higher tax withholding rate, especially if the addition of the bonus pushes you into a higher tax bracket for that pay period.
Here’s how the aggregate method typically works:
- Your employer adds your bonus to your regular wages for the pay period.
- They calculate the total tax withholding based on IRS withholding tables for the combined amount.
- The employer subtracts the tax withholding for your regular wages.
- The difference is withheld from your bonus.
This method often results in a higher tax withholding on your bonus compared to the percentage method. However, it may be more accurate in reflecting your actual tax liability, especially if you’re close to a higher tax bracket.
Which Method is Better for You?
Determining which bonus taxation method is better for you depends on various factors, including your regular income, the size of your bonus, and your overall tax situation. Let’s compare the two methods to help you understand their implications.
| Percentage Method | Aggregate Method | |
| PROS | Simplicity and predictabilityLower immediate tax withholding for most employees | More accurate reflection of your actual tax liabilityLess likely to result in a large tax bill when filing |
| CONS | May result in under-withholding if you’re in a higher tax bracketCould lead to a tax bill when filing your return | Higher immediate tax withholdingCan significantly reduce your take-home bonus |
To determine which method is better for you, consider your financial goals and tax planning strategy. If you prefer a larger immediate payout and are prepared to potentially owe taxes later, the percentage method might be preferable. If you want to avoid surprises at tax time and don’t mind a smaller immediate payout, the aggregate method could be more suitable.
Wondering how much you’ll pay in taxes on your bonus check? Use our handy Bonus Tax Calculator below.
Special Taxation Rules for High-Value Bonuses
When it comes to high-value bonuses, specifically those exceeding $1 million, special tax rules come into play. These rules are designed to ensure that high-income earners pay their fair share of taxes on substantial bonuses. If you’re fortunate enough to receive a bonus of this magnitude, here’s what you need to know.
- Mandatory Higher Withholding Rate. For any portion of a bonus that exceeds $1 million, the IRS requires a mandatory federal withholding rate of 37%. This rate applies regardless of your regular tax bracket or the method used for lower bonuses.
- Two-Tier Taxation. If your bonus is over $1 million, it will essentially be taxed in two tiers:
- The first $1 million is subject to the standard 22% withholding rate (or the aggregate method, if applicable).
- Any amount over $1 million is subject to the 37% withholding rate.
- Additional Medicare Tax. High-value bonuses may also trigger the Additional Medicare Tax of 0.9% on earnings above certain thresholds ($200,000 for single filers, $250,000 for married filing jointly).
It’s crucial to work closely with a tax professional if you receive a bonus of this magnitude to ensure proper tax planning and compliance with all applicable regulations.
The Exception to the Bonus Tax Rule
There is one type of bonus that is exempt from taxes – employee achievement awards for length of service or safety. In general, the following must be true in order to avoid paying taxes:
- The award is tangible personal property
- You did not receive cash, gift certificates, or an equivalent item
- The value is $1600 or less
- Your employer gave the award as “part of a meaningful presentation”
- The length-of-service award was for 5+ years and you have not received any in the last four years
- Less than 10% of eligible employees received a safety award during the year (managers, administrators, clerical employees, and other professional employees are ineligible)
Strategies to Reduce Your Bonus Tax Burden
Unfortunately, you generally can’t avoid paying taxes on your bonus entirely, but there are several strategies you can employ to potentially reduce your tax burden.
- Defer the Bonus. If possible, ask your employer to defer your bonus to a year when you expect to be in a lower tax bracket.
- Increase 401(k) Contributions. Use your bonus to max out your 401(k) contributions, reducing your taxable income for the year.
- Contribute to an HSA. If you have a high-deductible health plan, consider using your bonus to fund a Health Savings Account (HSA), which offers triple tax benefits.
- Make Charitable Donations. Donating a portion of your bonus to charity can provide a tax deduction while supporting causes you care about.
- Invest in Tax-Advantaged Accounts. Consider putting some of your bonus into tax-advantaged investment accounts like IRAs or 529 college savings plans.
- Use Loss Harvesting. If you have investments that have decreased in value, consider selling them to offset gains and reduce your overall tax liability.
- Explore Deductions and Credits. Work with a tax professional to identify additional deductions or credits you might be eligible for to offset the increased income from your bonus.
Although this guide provides a comprehensive overview of bonus taxation, tax laws can change, and individual circumstances vary. Always consult with a tax professional for advice tailored to your specific situation. By staying informed and proactive, you can maximize the value of your bonus and take significant strides toward your financial goals.