Why Is My Bonus Taxed So Much? Supplemental Wage Withholding Explained

Bonuses, commissions, overtime paid separately, severance, back pay, awards and prizes, and payouts for unused vacation are supplemental wages under IRS Publication 15. Employers can choose between two withholding methods when these are paid.

If the bonus is paid separately from regular wages (or identified separately on the same check), the employer may simply withhold a flat 22% federal income tax. For supplemental wages above $1 million in a calendar year, withholding on the excess is mandatory at 37%. Social Security (6.2%) and Medicare (1.45%) are also withheld, plus state tax.

The employer adds the bonus to your regular paycheck and withholds as if that combined amount were your normal pay every period. Because the withholding tables annualize each paycheck, a one-time spike looks like a much higher salary and can be withheld at 24%, 32% or more for that check. This method is what produces the most dramatic "my bonus got eaten" stories.

When you file, the bonus is simply added to your other wages on your W-2 and taxed at your marginal bracket. If your top bracket is 12%, the 22% withheld was too much and the difference comes back in your refund. If your top bracket is 24% or 32%, the flat 22% was actually too little and you may owe a bit more in April — a common surprise for higher earners with large bonuses. Our bonus tax calculator shows both the withholding and the likely final tax.

States set their own rules. Some publish a flat supplemental rate (California, for example, uses a higher flat rate for bonuses than for ordinary withholding), others require the aggregate method, and the nine states without a wage income tax withhold nothing. Check your state on our state salary pages.

• Ask whether you can direct part of the bonus to your 401(k). Pre-tax contributions reduce income tax (not FICA) on that money.
• Fund an HSA if you are eligible — contributions through payroll avoid income and FICA taxes.
• If you are consistently over-withheld on bonuses, you can lower regular withholding with a new W-4; if under-withheld, add a flat extra amount instead.
• Timing: a bonus paid in January instead of December moves the income to the next tax year, which can matter if your income will be lower then.