An annual bonus is taxed as ordinary income, but the withholding you see on the check follows a separate set of rules for what the IRS calls supplemental wages. Most employers withhold a flat 22% for federal income tax on a bonus paid separately from your regular wages, plus Social Security and Medicare, plus any state tax. That 22% is not your tax rate. It is a placeholder. When you file your return, the bonus is added to the rest of your income and taxed at your normal bracket, and you either owe the difference or get some back.
How Federal Withholding Works on a Bonus
The IRS classifies annual incentive payments as supplemental wages, a category that also covers commissions, overtime, and back pay.1eCFR. 26 CFR 31.3402(g)-1 – Supplemental Wage Payments Employers have two ways to withhold on this kind of pay.
The Percentage Method (Flat 22%)
When the bonus is paid separately from your regular paycheck, or shows up as a separately identified line item, the employer withholds a flat 22% for federal income tax.2Internal Revenue Service. Publication 15 (2026) – Employer’s Tax Guide No other percentage is permitted under this method. On a $10,000 bonus, $2,200 goes to federal withholding before FICA is calculated.
There is one exception at the top. If your supplemental wages from a single employer exceed $1 million in the calendar year, everything above that threshold is withheld at 37%, the highest individual rate for 2026. The employer must apply that rate regardless of what your Form W-4 says.2Internal Revenue Service. Publication 15 (2026) – Employer’s Tax Guide
The Aggregate Method
If the bonus is paid on the same check as your regular wages and is not separately identified, the employer instead uses the aggregate method. They treat the combined amount as one paycheck and apply the standard graduated withholding tables. Because that lump can land in a higher bracket for the pay period, aggregate-method withholding often comes out higher than a flat 22%. This is a common reason people feel their bonus was “taxed more” than expected. The year-end tax bill is the same either way; only the timing of withholding changes.
Social Security and Medicare on the Bonus
FICA applies to bonus pay the same way it applies to regular wages. For 2026, Social Security is 6.2% on earnings up to the wage base of $184,500.3Social Security Administration. Contribution and Benefit Base Once your combined salary and bonus for the year cross that number, Social Security withholding stops. If you already crossed it through regular pay before the bonus lands, no additional Social Security tax comes out of the bonus.
Medicare is 1.45% on every dollar with no cap. An additional 0.9% Medicare tax kicks in once your total wages pass $200,000, or $250,000 if you file jointly.4Internal Revenue Service. Topic No. 560 – Additional Medicare Tax Your employer is required to start withholding the extra 0.9% once your wages from that employer pass $200,000, regardless of filing status. If the joint threshold that applies to you is higher, you reconcile the difference on your return.
State Income Tax Withholding
Most states with an income tax also withhold on bonus payments, but the mechanics vary. Some states allow a flat supplemental rate on separately identified bonuses; others require the employer to apply the same graduated tables used for regular wages. A handful of states have no income tax at all, so bonuses paid there carry no state withholding. Where state supplemental rates apply, they range roughly from about 3.5% to over 10%. Your pay stub will show what your state took.
Why the Check Feels Small: Withholding vs. Actual Tax
The withholding rate on your bonus is not your tax rate. Whether your employer used the flat 22% or the aggregate method, the bonus is ultimately taxed at your ordinary income rate when you file. For 2026, federal rates run from 10% to 37% depending on your total taxable income.5Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
So the math cuts both ways. If you land in the 24% bracket and 22% came out, you owe the 2% difference at filing. If you’re in the 12% bracket, too much was withheld and you’ll see it back as part of your refund. Withholding is an estimate collected across the year. Everything settles on Form 1040.6Internal Revenue Service. Understanding Taxes – Module 2: Wage and Tip Income
One trap to watch. If the bonus is large and the 22% flat rate falls well short of what you actually owe, you can end up with an underpayment penalty. The IRS expects at least 90% of your tax liability to be paid in during the year through withholding or estimated payments.7Internal Revenue Service. Pay As You Go, So You Won’t Owe: A Guide to Withholding, Estimated Taxes, and Ways to Avoid the Estimated Tax Penalty If a bonus pushes you meaningfully above where you expected to end the year, submitting a new Form W-4 to bump withholding on your remaining paychecks is usually the cleanest fix.
Which Tax Year the Bonus Belongs To
A bonus is taxable in the year you have unrestricted access to it, not necessarily the year it was earned. Under the constructive receipt rule, income counts in the year it is credited to your account, set apart for you, or otherwise made available to draw on, whether you actually collect it or not.8eCFR. 26 CFR 1.451-2 – Constructive Receipt of Income If your employer tells you in December that the bonus is ready and you wait until January to pick it up, it is still December income.
Most annual incentive plans avoid the deferred compensation regime of Section 409A by qualifying for the short-term deferral exception. As long as the bonus is paid by the 15th day of the third month after the year in which the performance conditions were met (March 15 for calendar-year employers), it is not treated as deferred compensation.9eCFR. 26 CFR 1.409A-1 – Definitions and Covered Plans Miss that deadline without a qualifying reason and the plan can face 409A penalties, including an additional 20% tax on the employee.
Ways to Reduce What You Owe
You can’t change the rate that applies to your bonus, but you can lower the income it stacks on top of. A few moves work well when you know a bonus is coming.
- Route part of the bonus into your 401(k) if the plan allows bonus deferrals. For 2026, elective deferrals are capped at $24,500 if you’re under 50, $32,500 for age 50 and up, and $35,750 for workers aged 60 through 63 under the SECURE 2.0 higher catch-up. Whether your plan actually treats bonus dollars as eligible compensation depends on the plan document. Safe harbor 401(k) plans, for example, are allowed to exclude bonuses from the compensation definition as long as the exclusion doesn’t disproportionately favor highly compensated employees. Check the summary plan description or ask HR.10Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,50011Internal Revenue Service. Compensation Definition in Safe Harbor 401(k) Plans
- Fund an HSA if you have a high-deductible health plan. Contributions come out above the line and can be sourced from any income.
- Adjust your Form W-4 to raise withholding on the paychecks that remain in the year. Simpler than filing an estimated payment and enough to keep you out of underpayment penalty territory.
- Bunch charitable contributions into the bonus year. If your regular giving isn’t quite enough to itemize, concentrating it in a high-income year can push you past the standard deduction and let the donations actually reduce tax.
None of this changes the underlying character of the bonus as ordinary income. What these steps do is lower your adjusted gross income, which ripples through your bracket, your eligibility for credits and deductions, and the additional Medicare thresholds you may or may not cross.