Working hard all year to help your company meet its goals deserves a reward, and you've definitely earned that bonus. Your bonus counts toward your income for the year, so it's subject to income taxes. Read on to learn how much tax you can expect to pay on your bonus—and for tips on reducing your tax liability.
Key Takeaways
- If your employer issues you a stand-alone bonus check, your employer has some control over the withholding method if it is $1 million or less. A common method is to use a flat 22% withholding rate.
- If your bonus exceeds $1 million, the first $1 million is subject to the same withholding as above while the amount exceeding $1 million is subject to a 37% flat withholding rate.
- If your employer lumps your bonus into your regular pay, standard payroll withholding rules will typically be applied to it.
- Bonuses can be subject to state income taxes as well. These tax rates vary by state.
- You typically have to pay payroll taxes including the 1.45% Medicare tax plus the 6.2% Social Security tax on the amount of your wages, including your bonus. However, the Social Security tax is limited to the first $160,200 of wages for 2023 and increases to $168,600 for 2024.
How much are bonuses taxed?
Bonuses are considered wages and are taxed the same way as other wages on your tax return. However, the IRS doesn’t consider them regular wages. Instead, your bonus counts as supplemental wages and can be subject to different federal withholding rules than your regular wages when your get paid your bonus. How much your employer withholds from your bonus depends on several factors, but generally if your bonus is equal to or less than $1 million, your bonus will be included with your regular pay and subject to standard payroll withholding or subject to a flat 22% withholding rate.
Example: If you receive a $6,000 bonus for the year and the flat withholding rate is use, you'd have 22% or $1,320 withheld in federal taxes to be sent to the IRS ($6,000 x .22 = $1,320).
If you receive a very large bonus—over $1 million—you'll likely have 22% federal tax withheld on the first million, then 37% on the amount of the bonus above the first million.
Example: If you received a $2 million bonus, you'd pay $590,000 in federal tax withholding:
- $1,000,000 x .22 = $220,000 tax withholding on first million
- $1,000,000 x .37 = $370,000 tax withholding on second million
- $220,000 + $370,000 = $590,000 total tax withholding
Are bonuses subject to both federal and state taxes?
Your bonus is considered wages and is subject to the same state taxes as your regular wages, although, the state tax withholding rate will depend on the withholding rules for your state.
What other tax liabilities are bonuses subject to?
In some cases, you might have additional tax liabilities on the income from your bonus. For example, you'll likely have to pay:
- 6.2% Social Security tax on all of your wages including your bonus up to the 2023 Social Security cap of $160,200 (up to $168,600 for 2024)
- 1.45% Medicare tax on all of your wages including your bonus
TurboTax Tip: To reduce your tax liability, you can contribute to your 401(k) or an IRA. If you expect to retire or have less pay in the next tax year, you can ask your employer to defer your bonus until that year begins so that it might be taxed at a lower rate.
How are taxes withheld on bonus payments?
When it comes to actually withholding taxes on your bonus, your employer has two options: the percentage method or the aggregate method.
The percentage method is simplest—your employer issues your bonus and withholds taxes at the 22% flat rate—or the higher rate if your bonus is over $1 million.
The aggregate method is used when your employer issues your bonus with your regular salary paycheck and uses the total amount to calculate the amount of withholding. For example, if you normally withhold 35% of your pay for income taxes, the amount of withholding on your bonus would also be 35%.
Using the aggregate method doesn't mean that you actually have to pay more tax on your bonus. It just means that you will have that amount withheld from the payment. You might have and increased refund for withholding too much tax. But it does mean that you could see less of the cash from your bonus when you get your paycheck.
Use this bonus taxation calculator to figure out how much tax would be withheld on the amount of your bonus using either method, so you can know exactly how much money to expect.
When are taxes on bonuses paid?
Taxes for your bonus should be withheld from your paycheck by your employer. If the amount of taxes withheld from your paycheck doesn’t cover your total tax liability for that bonus, you may owe taxes when you file your tax return. If the withholding is greater than the tax calculated on your tax return, then you will likely be due a refund.
Why is tax withholding on bonuses so high?
Since bonuses are paid in addition to your normal paycheck, taxes are withheld at a higher rate than your regular wages. This is because they are considered supplemental income.
In general, most everything that falls under “supplemental income” is subject to different requirements, including how it is dispersed, reported, and how taxes are withheld.
Are all types of bonuses taxable?
Bonuses paid to you are taxable because they are income under Section 61 and no IRC section excludes them from taxation.
However, if you receive fringe benefits – for example, tickets to an event or gift baskets – these may not always be considered taxable. Certain fringe benefits are considered a separate form of pay or remuneration and might be taxable.
Special rules may also apply to achievement awards that may be given as an alternative to a traditional bonus. These achievement awards often include:
- Cash
- Cash equivalents
- Vacations
- Meals
- Lodgings
- Theater or sports tickets
- Securities
It’s important to correctly determine whether fringe benefits or bonuses are taxable. The frequency and value of the bonus can affect whether taxes need to be withheld.
How can you avoid taxes on bonuses?
While you likely can't avoid paying taxes on your bonus entirely, you can use your bonus funds wisely to reduce how much you'll owe at tax time.
How can you lower taxes on bonuses?
There are several ways you can lower the amount you pay in taxes for your bonuses.
The first method for lowering your tax liability is to reduce your taxable income:
- Use the funds to contribute to your 401(k) or IRA to lower your taxable income.
- If you expect to take a pay cut in the next year—for example, if you're ready to retire—ask your employer to defer your bonus until the following tax year to lower your overall tax liability.
- Contribute to a health savings account (HSA) to reduce your taxable income.
Another method for possibly lowering your tax liability is to itemize your deductions and:
- Use your bonus to pay for out-of-pocket medical expenses that aren’t reimbursable
- Note: For this to be applicable, your expenses would have to be over 7.5% of your Adjusted Gross Income (AGI) and you would need to itemize your expenses when filing your taxes.
- Make a donation to charity
While your bonuses will often be taxable, you can find ways to lower your tax burden by postponing, deferring the bonus, or generating additional deductions.
Will you receive a refund if you overpay taxes on your bonus?
In some cases, the withholding methods for bonuses can withhold too much tax from your bonus pay. If more tax was withheld from your bonus than you actually owe, you should receive a refund when you file your taxes.
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