How bonuses are taxed

A bonus is taxed at the same rates as the rest of your income, but it's often withheld differently. When a bonus is paid separately from your regular pay, your employer can withhold federal income tax at a flat 22%, or add the bonus to a regular paycheck and withhold on the total. Social Security and Medicare come out of a bonus in full either way, and many states have their own flat rate for bonuses too.

The withholding is an estimate. When you file your return, the bonus is simply part of your income for the year, and any difference between what was withheld and what you owe comes back as a refund or is paid then.

Bonuses are supplemental wages

The IRS calls payments that aren't regular wages supplemental wages. Publication 15 lists bonuses, commissions, overtime pay, payments for accumulated sick leave, severance pay, awards, prizes, back pay, reported tips and retroactive pay increases, among others. Employers may treat overtime pay and tips as regular wages instead.

How an employer withholds on a supplemental payment depends on whether it's identified separately from your regular wages.

Paid with your regular pay

If your bonus is paid in the same check as your regular wages and the two amounts aren't shown separately, your employer withholds as if the total were your regular pay for that period. Because withholding treats each paycheck as if you earned that much every period, a large combined check is withheld at higher bracket rates, even though your yearly tax is worked out on your actual income.

Paid separately: two methods

If the bonus is paid separately, or shown as a separate amount on the same check, and your employer withheld income tax from your regular wages this year or last year, it can choose between two methods:

• The flat rate. Withhold a flat 22% of the bonus. Publication 15 says no other percentage is allowed for this method. Your W-4 isn't used.
• The aggregate method. Add the bonus to your regular wages for the current or previous pay period, work out the withholding on the total as if it were one payment, subtract the tax already withheld from the regular wages, and withhold the rest from the bonus.

If no income tax was withheld from your regular wages in the current or previous year, the employer has to use the aggregate method.

Here's how the two methods compare on the same bonus, computed with the same engine as the calculator:

On this salary, the aggregate method withholds a little more, because the combined paycheck looks like a much higher yearly income to the withholding tables. The gap grows on higher salaries, and on lower salaries the aggregate method can withhold less than the flat rate. Neither changes the tax you owe for the year.

The aggregate method, step by step

1. Take the regular wages for the pay period the bonus is added to: the current one or the one before.
2. Add the bonus and treat the total as a single paycheck.
3. Work out the federal withholding on that total with the usual tables and your W-4.
4. Subtract the tax already withheld, or to be withheld, from the regular wages.
5. Withhold what's left from the bonus.

If more than one supplemental payment is made in the same pay period, all of them are added to the regular wages together, and the tax already withheld on earlier payments is subtracted too.

Bonuses over $1,000,000

When your supplemental wages from one employer pass $1,000,000 in a calendar year, the part above that amount must be withheld at 37%, the highest income tax rate. That applies whatever your W-4 says, and payments from businesses under common control count together.

Social Security and Medicare on a bonus

Whichever method is used for income tax, bonuses are subject to Social Security and Medicare like any other wages: 6.2% for Social Security until your wages for the year reach $184,500, and 1.45% for Medicare, plus 0.9% Additional Medicare Tax on wages above $200,000. A large bonus can take you past the Social Security wage base early, after which your later paychecks have no Social Security withheld. The FICA guide explains the wage base.

State tax on bonuses

States set their own rules. Some follow the federal approach with a flat state rate for bonuses paid separately; others add the bonus to your regular pay, and states without a wage income tax take nothing:

Some of these rates are optional, so your employer may use the regular tables instead. New Jersey has no flat bonus rate: a bonus paid separately is withheld without your allowances. In Arkansas, bonuses paid together with regular wages are withheld at a flat rate. Each state calculator page explains its bonus rule.

Commissions, severance and other supplemental pay

The same rules cover the other kinds of supplemental wages. Commissions paid separately from your salary, severance pay, payouts of accumulated sick leave, back pay and retroactive raises can all be withheld at the flat 22% or through the aggregate method, and all are subject to Social Security and Medicare. Taxable fringe benefits and expense allowances paid without receipts under a nonaccountable plan count as supplemental wages too.

If you're paid largely on commission, much of your pay may be withheld at the flat rate rather than through your W-4, so your withholding can be further from your actual tax than for someone paid a steady salary.

Adjusting your W-4 for a bonus

Because the flat method ignores your W-4, changing the form won't change withholding on a bonus paid that way. It does affect bonuses withheld through the aggregate method, and all your regular paychecks. Form W-4 suggests using the IRS Tax Withholding Estimator if you receive bonuses, and Step 4(c) lets you add extra withholding to each regular paycheck if you expect to owe more at tax time. The W-4 guide covers each step.

Why a bonus check can look small

A few things combine to make a bonus check smaller than people expect:

• federal withholding at 22% or through the aggregate method;
• Social Security and Medicare on the full amount;
• state withholding, sometimes at a flat rate higher than your usual rate;
• a 401(k) percentage, if your plan applies it to bonuses.

Much of the difference is timing. If more was withheld than the tax you owe on the bonus, the excess comes back when you file.

Estimating a bonus

In the paycheck calculator, open "More options" and enter a bonus amount to see federal withholding at the flat rate, Social Security and Medicare, and what's left. If your bonus is part of a raise in base pay instead, the pay raise calculator shows the new take-home pay per paycheck. To put a bonus in context against your hourly rate, the conversion pages such as what 30 dollars an hour is per year show your regular yearly pay.

For decisions about bonus timing or deferral, a tax professional can look at your full situation.