How Bonuses Are Taxed (and Why It Looks Worse)

By Tom, CPA · Updated October 27, 2026

Part of: Tax Planning

TL;DR: A bonus is taxed like salary at your regular brackets. What differs is withholding: usually a flat 22% (37% above $1 million) plus Social Security and Medicare. If your bracket is above 22%, expect to owe at filing. 401(k) and HSA deferrals and timing actually reduce the tax.

Educational only, not tax, legal, or investment advice. Examples are illustrations, not predictions. Rules and limits change; verify current figures and talk to a qualified professional about your situation.

The tax code is 4 million words long, and none of them say bonuses are taxed more than salary. Yet every year, someone opens a paycheck stub, sees a chunk of their bonus gone, and announces at dinner that "bonuses are taxed at like 40%." They are not. They are withheld differently. The tax is the same as on any other wage.

This guide explains supplemental wage withholding for 2026, why your refund or balance due sorts it out in April, Social Security and Medicare on bonuses, and the moves that actually reduce the tax: 401(k) deferrals, HSA contributions and timing.

CPA Warning Label: Withholding at 22% can leave high earners short. Check the IRS withholding estimator after any large bonus to avoid an underpayment penalty.

Withholding is not tax

A bonus is ordinary wage income. It goes on your W-2 in box 1 with your salary and is taxed at your regular brackets when you file. There is no special bonus tax rate.

What is different is withholding, the estimate your employer sends to the IRS during the year. Bonuses are "supplemental wages," and employers can withhold on them in one of two ways (Publication 15, 2026):

• Flat rate method: 22% federal withholding on supplemental wages up to $1 million for the year. The 2025 tax act made the 22% rate permanent.
• Aggregate method: the employer adds the bonus to your regular paycheck and withholds as if you earned that much every pay period. This can withhold far more than 22% for a big bonus, because the formula thinks you are suddenly rich all year.

Supplemental wages over $1 million in a calendar year must be withheld at 37%, the top rate, no choice.

So if your marginal bracket is 24% and your employer withholds 22%, you are slightly under-withheld on the bonus. If your bracket is 12%, the 22% flat rate over-withholds, and you get the difference back as a refund. The final tax is figured on your return.

Social Security, Medicare and state

On top of income tax withholding, bonuses are subject to FICA:

• Social Security: 6.2% on wages up to the 2026 wage base of $184,500. If your salary plus bonus crosses that line, Social Security withholding stops for the rest of the year. The 2027 base is $192,300.
• Medicare: 1.45% on all wages, plus 0.9% Additional Medicare Tax withheld on wages over $200,000 from that employer. The actual Additional Medicare threshold for married couples is $250,000 combined, so withholding can be off in either direction.
• State: most states with an income tax have their own supplemental rate. Some use a flat rate; some use aggregate. See state income tax planning.

Add it up and a bonus stub can easily show 35-45% total withheld. That is where the "40% bonus tax" legend comes from. Most of it is either real tax you also pay on salary, or over-withholding you get back.

Moves that actually reduce tax on a bonus

• 401(k) deferral. Many plans let you defer a percentage of the bonus. The 2026 employee limit is $24,500, plus $8,000 catch-up at 50+ ($11,250 at ages 60-63). Check whether your election applies to bonuses; some plans require a separate election. Note: if your prior-year FICA wages exceeded $150,000, catch-up contributions must be Roth starting 2026.
• HSA. If you have HSA-eligible coverage, payroll HSA contributions avoid income tax and FICA. Limits for 2026: $4,400 self-only, $8,750 family.
• Timing. A bonus paid in January is taxed next year. If you expect a lower bracket next year (sabbatical, retirement, a move to a no-tax state), ask whether payment timing is flexible. Once you have the right to the money, constructive receipt rules generally stop you from choosing later.
• Deferred compensation plans. Nonqualified deferred comp lets some executives defer bonuses for years, but the election usually must be made the year before, and the money is an unsecured promise from your employer.
• Bunch deductions. A big bonus year is a good year to front-load charity through a donor-advised fund, since itemized deductions save more at higher brackets. From 2026, itemized charity has a 0.5% of AGI floor.

Bank and brokerage sign-up bonuses are a different animal: usually 1099-INT or 1099-MISC income, not wages. See bank account bonuses and brokerage transfer bonuses.

Illustration: a $30,000 bonus

Illustration: a single filer with a $110,000 salary in 2026 gets a $30,000 bonus. Total wages: $140,000. Taxable income after the $16,100 standard deduction: $123,900.

Withholding on the bonus (flat method):

Actual federal income tax on the bonus: the 24% bracket for singles runs from $105,700 to $201,775 of taxable income. Without the bonus, taxable income would be $93,900. The bonus fills $11,800 of the 22% bracket (up to $105,700) and $18,200 at 24%. Tax on the bonus: $2,596 + $4,368 = $6,964. Withheld: $6,600. She owes about $364 more at filing, assuming her salary withholding was accurate.

With a 10% bonus deferral to her 401(k): $3,000 deferred cuts income tax by $720 at 24%, still subject to FICA.

Assumptions: no other income, no state tax, salary withholding accurate.

Special situations: sign-on, retention, and severance

Not every bonus is a year-end thank-you. A few variations come with their own wrinkles:

• Sign-on bonuses with clawbacks. If you leave early and repay a sign-on bonus in a later year, you do not simply un-report it. Repayments over $3,000 may qualify for the claim-of-right rules, letting you take a deduction or a credit for the tax paid in the earlier year, whichever is better. Smaller repayments are generally not deductible under current law. Repaying in the same year is cleaner: ask the employer to correct your W-2.
• Retention bonuses paid in installments are wages when paid, not when promised.
• Severance is also supplemental wages, withheld at the same 22% flat rate. See unemployment and severance taxes.
• Stock bonuses. Shares granted as a bonus are wages at fair market value on the vest or grant date, and employers often withhold by selling shares. See RSU tax planning.
• Non-cash awards. Gift cards are always taxable wages. Small, occasional non-cash gifts like a holiday ham may be excludable as de minimis fringe benefits.

Bonuses also count toward the Roth catch-up wage test and can push income past phaseouts for Roth IRA contributions (2026 MFJ range $242,000 to $252,000) and other credits. A large bonus in December can change your eligibility for things you planned around in January, so check before you contribute directly to a Roth IRA.

Avoiding an April surprise

The real risk with bonuses is not the tax rate; it is under-withholding. If you are in the 32% or 35% bracket and your bonus is withheld at 22%, you could owe thousands at filing and possibly an underpayment penalty.

• Use the IRS Tax Withholding Estimator after a bonus.
• Adjust your W-4 line 4(c) to add extra withholding for the rest of the year. Withholding is treated as paid evenly through the year for penalty purposes, which makes late-year W-4 changes a useful fix.
• Safe harbor: no penalty if you paid 100% of last year's tax (110% if last year's AGI exceeded $150,000) through withholding and timely estimates, or 90% of this year's.

One more lever: if you also make quarterly estimated payments, a big bonus with extra withholding can cover a shortfall from investment income, because withholding is credited evenly across the year while estimates count when paid. That makes a December bonus a convenient catch-up tool. Conversely, if your employer badly over-withholds via the aggregate method, you can lower withholding on later paychecks with a new W-4 instead of waiting for a refund. Your money, your interest-free loan decision.

See penalties and interest and the tax planning hub.