How bonuses are taxed

A bonus is ordinary income

There is no separate tax rate for bonuses. A bonus, commission, award or retroactive raise is wages, and at the end of the year it is added to your salary and taxed in the same brackets. What is different is how much your employer withholds from the bonus check, because the IRS lets employers treat it as "supplemental wages".

The two ways employers withhold

The flat-rate (percentage) method

If the bonus is paid separately from your regular pay, or shown separately on the stub, most employers withhold a flat 22% of it for federal income tax. That rate comes from IRS Publication 15 and is the same for everyone, whatever your salary, filing status or W-4. Supplemental wages over a million dollars in a year are withheld at the top federal rate instead.

The aggregate method

Some employers add the bonus to a regular paycheck and run the total through the normal withholding tables, as if you earned that much every pay period. That can withhold much more than 22%, because the tables assume the large check repeats all year. This is why a bonus paid with a regular check sometimes seems to vanish.

Either way, Social Security (6.2% until your pay for the year reaches $184,500) and Medicare (1.45%) come out of the bonus in full, along with state and local tax where they apply.

Withheld versus owed

Flat-rate withholding is a rough average. Whether it is too much or too little depends on your real top bracket:

• A single person on $50,000 in Texas who gets a $5,000 bonus has $1,100 withheld for federal tax. The bonus actually adds about $600 to the year's federal tax, so roughly $500 comes back as a refund or lower balance due.
• A single person on $260,000 gets the same $1,100 withheld, but the bonus adds about $1,600 to their tax, because it lands in a higher bracket. They will owe about $500 more when they file.

For most people with salaries in the middle brackets, 22% is close to the real rate, so the difference is small.

What a bonus check looks like

Here is a $5,000 bonus for a single person earning $70,000 in Colorado, withheld with the flat-rate method:

• Federal income tax at 22%: $1,100.00
• Social Security and Medicare: $382.50
• Colorado income tax and FAMLI premium: $242.00
• Check: about $3,275.50, or 66% of the bonus

State and local tax on a bonus

States set their own rules for supplemental wages. Many have a flat bonus withholding rate of their own, some use the regular tables, and a few let employers choose. As with federal tax, the state's withholding is not the final word: the bonus is added to your income on the state return. Local wage taxes, such as Philadelphia's or an Ohio city's, apply to bonuses at the same rate as regular pay, and Social Security stops once your pay for the year, bonus included, passes $184,500. That is why a December bonus for a high earner can have less taken out for Social Security than a bonus earlier in the year.

The bonus calculator shows both the withholding and the real tax the bonus adds for your state and city.

Ways to keep more of a bonus

• Put some into your 401(k). Many plans let your deferral percentage apply to bonuses. A traditional contribution avoids income tax on that part now (see the 401(k) guide), up to the $24,500 yearly limit.
• Check the timing. A bonus paid in January instead of December falls in the next tax year. That matters if you expect a lower income next year.
• Do not change your W-4 just for the bonus. The extra withholding is usually settled at filing. If you consistently owe or get large refunds, adjust the W-4 as explained in the W-4 guide.