Yes. Bonuses are taxed differently from regular income.
The IRS treats them as supplemental wages, which results in a different tax rate. Knowing this helps you plan your finances and avoid tax surprises
What Are Bonuses?
Bonuses are extra payments given by employers, usually as a reward for good performance, meeting targets, or company profitability. Unlike your regular salary, they’re not fixed and can vary in amount.
For example, if you get a $5,000 bonus at the end of the year for exceeding sales goals, that amount is considered a bonus and treated differently for tax purposes.
Why Are Bonuses Taxed Differently?
We’ve seen that bonuses are classified as “supplemental income” by the IRS. But what does it mean? They aren’t taxed the same way as your usual wages.
Instead of following the usual progressive tax brackets, they’re taxed with a specific set of rules designed for supplemental income.
The IRS's Flat Tax Rate on Bonuses
For bonuses under $1 million, the IRS withholds a flat 22% for federal taxes.
That’s why your bonus check might feel lighter than your regular paycheck, which uses your W-4 settings. If your bonus tops $1 million, the first million gets that 22% withholding.
Anything extra?
It’s withheld at 37%, the top federal rate in 2025. But heads up, those are just withholding rates. Your actual tax depends on your income, deductions, and credits when you file.
Some employers mix bonuses with regular pay for withholding, so amounts may vary. Plus, state taxes could take a bite, depending on where you live.
How This Works in Practice
Let’s break down how taxes are calculated on bonuses. We’ll look at two examples: a $50,000 bonus and a much larger $1.5 million bonus.
This will help you understand how much you actually take home after all deductions.
Example 1: $50,000 Bonus
When you receive a bonus of $50,000, the IRS automatically withholds 22% for federal taxes. To calculate how much is withheld, multiply the bonus amount by 22%.
50,000 x 0.22 = 11,000
This means that $11,000 is taken out for federal taxes, leaving you with $39,000 before any additional deductions.
Next, the Social Security tax needs to be considered. The Social Security tax rate is 6.2%, but it only applies to income up to a wage cap, which in 2025 is $168,600. If your annual earnings, including the bonus, do not exceed this cap, you’ll need to pay Social Security tax on the entire bonus amount.
50,000 x 0.062 = 3,100
So, $3,100 is deducted for Social Security.
After that, there’s the Medicare tax, which is 1.45% regardless of income level. To calculate this amount, multiply the bonus by 1.45%.
50,000 x 0.0145 = 725
If your state has a 5% income tax rate, you also need to calculate that deduction.
50,000 x 0.05 = 2,500
Now, let’s add all these deductions to find the total amount taken out:
11,000 (federal) + 3,100 (Social Security) + 725 (Medicare) + 2,500 (state) = 17,325
Subtract the total deductions from your bonus to find out what you take home:
50,000 – 17,325 = 32,675
After all deductions, your net bonus would be about $32,675.
Example 2: $1.5 Million Bonus
When the bonus amount is significantly higher, like $1.5 million, the calculation is a bit different. The IRS withholds 22% on the first $1 million.
1,000,000 x 0.22 = 220,000
For the remaining $500,000, the withholding rate increases to 37%.
500,000 x 0.37 = 185,000
Add both withholding amounts to get the total federal deduction:
220,000 + 185,000 = 405,000
After federal taxes, you are left with:
1,500,000 – 405,000 = 1,095,000
Social Security taxes only apply up to the wage cap. If your income, including the bonus, has already exceeded the $168,600 cap, you don’t pay additional Social Security on the bonus. Therefore, in this scenario, there is no further Social Security deduction.
However, the Medicare tax still applies to the entire bonus amount. Multiply $1.5 million by 1.45%.
1,500,000 x 0.0145 = 21,750
If your state also taxes income at a rate of 5%, calculate that as well.
1,500,000 x 0.05 = 75,000
Adding all the deductions gives:
405,000 (federal) + 21,750 (Medicare) + 75,000 (state) = 501,750
Subtracting the total deductions from the original bonus amount:
1,500,000 – 501,750 = 998,250
After all taxes, your net bonus would be approximately $998,250.
Is Overtime Taxed the Same Way?
No. Overtime pay is taxed like regular wages, not as supplemental income.
The confusion comes from seeing higher withholding on a paycheck that includes overtime. When your paycheck size suddenly increases, the system might assume you’re earning more annually, leading to temporarily higher withholding.
Once your annual tax is calculated, any extra withholding gets refunded if it’s too much.
Why the Confusion Happens
If you regularly earn $1,000 per week and one week you earn $1,500 with overtime, the system might calculate as if you make $1,500 every week. This leads to higher withholding temporarily, but it doesn’t mean you’re paying more in taxes overall.
How Bonus Tax Affects Your Paystub
Your bonus will appear as a separate line item on your paystub. Don’t be surprised to see a big difference between the gross amount and what you take home. Payroll systems often withhold more upfront to account for the bonus.
Calculating Your Take-Home Bonus
If you get a $10,000 bonus, expect $2,200 taken out for federal taxes. Add Social Security (6.2%) and Medicare (1.45%), which total $765, leaving you with around $7,035 before state taxes.
Feel free to revisit the two examples above for a clearer understanding.
How Should You Handle Your Bonus?
Receiving a bonus is exciting, but once you know how bonuses are taxed, it’s important to take a few steps to keep your finances in check.
By planning, you can make the most of your extra income while avoiding any tax surprises.
1. Review Your Pay Stub
One of the first things you should do is carefully review your pay stub, especially if it includes a bonus. Double-check that the correct amount has been withheld for federal, state, Social Security, and Medicare taxes.
Mistakes can happen, and it’s better to catch them early rather than deal with discrepancies later.
2. Consult a Tax Professional
If your bonus is on the larger side, it might be worth consulting with a tax expert. They can help you understand how your bonus affects your overall tax liability and suggest ways to minimize what you owe.
A professional can also help you strategize if your bonus pushes you into a higher tax bracket.
3. Adjust Your W-4
If you find that too much is being withheld from your paychecks, consider updating your Form W-4.
Adjusting your withholding can help balance out your taxes throughout the year, ensuring you’re not giving the IRS more than necessary.
This way, you can keep more of your money upfront and reduce the chance of overpaying.
4. Plan Ahead
It’s a good idea to set aside a portion of your bonus specifically for taxes. This proactive step can help you avoid any last-minute scrambles when tax season comes around.
Knowing how much will be deducted in advance makes financial planning much smoother.
Make Your Finances Crystal Clear
Tracking your earnings and deductions shouldn’t be hard. With PayStubHero, you can easily generate accurate, professional pay stubs that reflect your bonus and tax withholdings.
Stay organized and confident about your finances. Get your legit pay stubs now!
FAQs
Below are some common questions related to bonus taxes.
