Taxation of Bonuses and Supplemental Wages

Taxation of Bonuses and Supplemental Wages

Are Bonuses Taxable?

Yes. Bonuses are ordinary income and taxed at your marginal rate — just like wages.

How Employers Withhold on Bonuses

Flat Rate Method (Most Common)

• Withhold 22% federal tax on bonuses up to $1 million
• Withhold 37% on bonuses above $1 million
• Simple and commonly used

Aggregate Method

• Combine bonus with regular paycheck
• Calculate withholding on the total
• Can result in higher withholding in high-income months

Why Your Bonus Seems Heavily Taxed

The withholding rate isn't the same as your actual tax rate. If you're in the 12% bracket, your bonus is withheld at 22% but taxed at 12% on your return — resulting in a larger refund.

Strategies to Minimize Bonus Tax Impact

1. Increase 401(k) contributions in bonus paycheck (if allowed)
2. If possible, defer bonus to a lower-income year
3. Make a deductible IRA contribution to offset the additional income

State Tax on Bonuses

Most states tax bonuses like regular income. Withholding methods vary by state.

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Got a big bonus? Let us plan for the tax impact and identify offsetting strategies.