How Your Bonus Is Taxed

Being awarded a bonus on top of your regular pay can be a welcome sign of appreciation – but sometimes it can be hard to hear the bonus amount and not immediately question, “How much is this really?” That’s because a bonus’s tax withholdings are immediate and can vary based on the size of the bonus and even how it is paid. Here’s everything you need to know about how your bonus is taxed, plus some strategies to make that tax bite hurt a little less.

Bonuses Are Considered “Supplemental Wages”

The IRS considers any payment an employee receives on top of their normal earnings as “supplemental wages,” including bonuses, tips, commissions and awards. Like regular income, supplemental wages are considered taxable income and are subject to withholding – but how much must be withheld varies depending on how the employer actually pays the bonus.

If You Receive a Separate Bonus Check

If your employer gives you a separate bonus check, then it will withhold federal income taxes using the percentage method. This is a flat rate required by the IRS that varies based on the size of the bonus. In 2025:

• For amounts under $1 million, the employer withholds 22%.
• For amounts over $1 million, the employer withholds 22% for the first $1 million but 37% for the remainder.

When it’s time to file your tax return, your bonus will be treated as regular income (Box 1 on your W-2, under “Wages, Tips, Other Compensation”). If the tax cost of your bonus is less than 22%, your withholding exceeded your tax cost, and you will receive a tax refund for the difference (or it will be applied to the tax due on any other income). If the tax cost of your bonus is more than 22%, your withholding was less than your tax cost, and you will owe the difference between what was withheld and your total tax cost.

If Your Bonus Is Included in Your Regular Paycheck

If your employer gives you your bonus in the same check as your regular pay, then it will withhold federal income taxes using the aggregate method. With the aggregate method, your employer adds your bonus and base pay, determines what withholding rate applies and withholds based on that amount. This method takes longer to calculate and runs the risk of exceeding the actual tax cost, but it tends to be more accurate and less likely to leave the employee with a surprise bill come tax time.

Note that regardless of which method the employer uses to calculate federal tax withholding, your bonus will be subject to state income tax (if your state has one) as well as Social Security and Medicare taxes. If you are deferring income into a retirement plan, such as a 401(k), a portion of the bonus may be withheld for that as well.

Strategies To Mitigate Your Bonus’s Impact on Taxes

While there’s no eliminating the tax burden of a bonus altogether, you might be able to lower it. Here are some ways to reduce the sting of taxes from your bonus:

• Reduce your taxable income. A bonus can be a sudden and dramatic increase to your taxable income – so you might consider seeking out ways to decrease it. Contributions to your 401(k), traditional IRA or HSA can reduce your taxable income while giving your long-term financial plans a boost. If the bonus causes an unusual spike in your income, maybe an itemized deduction strategy, like bunching, is appropriate.
• Review your W-2. Sometimes bonuses come out of the blue, but sometimes they are a predictable portion of your total compensation. If you have a good idea on the likelihood, timing and size of your bonus, you might be able to adjust the withholding on your other income accordingly and blunt its impact the following April.

Of course, there’s also the issue of what to do with your new fortune. From building an emergency fund to tackling credit card balances to paying off medical debt, there are lots of ways your bonus can benefit you now and long into the future. Your Baird Financial Advisor can review with you your options so you’re making the most of this opportunity.

Editor’s Note: This article was originally published July 2022 and was updated April 2025.

The information offered is provided to you for informational purposes only. Robert W. Baird & Co. Incorporated is not a legal or tax services provider and you are strongly encouraged to seek the advice of the appropriate professional advisors before taking any action. The information reflected on this page are Baird expert opinions today and are subject to change. The information provided here has not taken into consideration the investment goals or needs of any specific investor and investors should not make any investment decisions based solely on this information. Past performance is not a guarantee of future results. All investments have some level of risk, and investors have different time horizons, goals and risk tolerances, so speak to your Baird Financial Advisor before taking action.