You just crushed your quarterly goals. Your boss sends an email saying a $5,000 bonus is coming your way. You start window shopping for a new mountain bike or maybe planning that weekend in Tahoe. Then the direct deposit hits. It isn't $5,000. It isn't even close. After the California tax on bonuses takes its bite, you’re staring at a number that feels like a clerical error. It’s a gut punch.
Welcome to the Golden State's unique way of handling "supplemental wages."
Most people assume their bonus is taxed just like their regular salary. They think if they’re in a 22% federal bracket and a 6% state bracket, that’s what disappears. Nope. California is one of the few states that plays by a different set of rules for one-off payments. It’s confusing, it’s frustrating, and honestly, it’s why so many tech workers in Silicon Valley or film crews in Burbank end up venting on Reddit every February.
The Flat Rate Trap
In California, the Franchise Tax Board (FTB) doesn't want to wait for you to file your return to get their cut. They want it now.
📖 Related: Enterprise Products Stock Price: Why 2026 Is the Year Everyone’s Watching
When your employer cuts a bonus check, they generally use the "supplemental wage" withholding method. Instead of looking at your total annual income or your W-4 exemptions, the state mandates a flat withholding rate. For most bonuses, that rate is 10.23%.
Think about that for a second.
If you usually pay about 4% or 6% in California state income tax, the government is essentially grabbing double your usual rate right off the top. They do this because they assume a bonus might push you into a higher tax bracket. By taking a bigger chunk upfront, the state avoids a situation where you owe a massive bill come April. But for you, the taxpayer, it feels like a penalty for working hard.
It gets even heavier if you’re a high earner receiving stock options or RSUs. If your supplemental wages for the year exceed $1 million, that flat rate jumps to 14.3%. California doesn't mess around when it comes to the wealthy.
Federal Withholding vs. State Withholding
You can't blame California for the whole disappearance of your bonus. The IRS is the bigger shark in the water. Federally, supplemental wages are usually withheld at a flat 22%.
So, let's do the math on that $5,000 bonus.
The IRS takes $1,100 (22%).
California takes $511.50 (10.23%).
Then you’ve got Social Security (6.2%) and Medicare (1.45%), which eat another $382.50.
Before you’ve even seen a dime, $1,994 has vanished. You’re left with roughly $3,006. You lost nearly 40% of your reward to various tax entities. It’s a bitter pill.
Some companies use the "aggregate method" instead of the flat rate. This is where they add your bonus to your regular pay for one period and tax the whole thing as if that’s what you make every single pay period. This is often worse. If you normally make $4,000 every two weeks but get a $10,000 bonus, the software thinks you earn $364,000 a year. It withholds at a massive rate, and you might see even less of that bonus in your bank account than if they used the flat 10.23% California rate.
Is the California Tax on Bonuses Just a Withholding Issue?
Here is the secret most people miss: Withholding is not the same as the actual tax you owe.
✨ Don't miss: Who is the richest people on earth right now: The 2026 wealth surge explained
When you file your taxes at the end of the year, the FTB looks at your total income. They don't care if it came from a bonus, a regular paycheck, or a side hustle. It all goes into one big bucket. If that 10.23% they took from your bonus was actually higher than your effective tax rate, you get that money back as a refund.
Basically, you’re giving the State of California an interest-free loan.
If your actual tax bracket is 8%, but they took 10.23% from the bonus, you’ve overpaid. You’ll see that money again in the spring. But that doesn't help you pay for the mountain bike today. It’s a liquidity problem. You’ve earned the money, but the state is holding onto it "just in case."
Why California is So Aggressive
California has a highly progressive tax system. We have the highest top marginal rate in the country at 13.3% (including the Mental Health Services Act tax on income over $1 million). Because our state budget relies heavily on capital gains and bonuses from high-income earners, the FTB is aggressive about getting that cash early.
Economic volatility hits California hard. When the tech market dips or Hollywood goes on strike, tax revenue plummets. By enforcing a flat 10.23% withholding on supplemental wages, the state creates a more predictable cash flow. It’s built-in insurance for the state treasury.
Strategies to Manage the Hit
You can't really "opt out" of the 10.23% rate if your company uses the supplemental method. It’s the law. However, there are ways to soften the blow to your overall financial picture.
One common tactic is adjusting your 401(k) contributions. If you know a big bonus is coming, you can increase your pre-tax contribution percentage for that specific pay period. If you put a huge chunk of that bonus directly into your 401(k), that portion isn't subject to federal or state income tax withholding. You won't see the cash in your checking account, but you’ll keep 100% of it in your retirement fund rather than losing 40% to taxes immediately.
Another thing to watch is your W-4 and DE 4 forms. If you consistently get a massive refund every year because of how California taxes your bonuses, you might be over-withholding on your regular paychecks. You could technically increase your allowances on your regular pay to bring home more money throughout the year, offset by the fact that the state is over-taxing your bonus.
But be careful. If you under-withhold too much, California will hit you with an underpayment penalty. The FTB is not known for its leniency.
Real-World Example: The "Surprise" RSU Tax
I talked to a software engineer in Mountain View last year who received $100,000 in Restricted Stock Units (RSUs). When they vested, the company automatically sold about 45% of the shares to cover taxes. The engineer was furious. They thought they were in a lower bracket.
But between the 22% federal flat rate, the 10.23% California supplemental rate, and payroll taxes, 45% is actually standard. For high-value bonuses or stock vests, the "sell to cover" method is almost always used, and it highlights just how deep the California tax on bonuses cuts.
Final Steps for Your Bonus
Don't let the math ruin the celebration. A bonus is still extra money you didn't have before. To handle it correctly:
- Check your paystub immediately. Look for the "Supplemental Tax" line item. Ensure it’s actually 10.23% and not a mistake.
- Run a mid-year tax projection. If you’re a high earner, use a tool like the FTB’s tax calculator or talk to a CPA to see if that 10.23% withholding is actually going to cover your liability.
- Don't spend the "gross" amount. When your boss says you're getting $10,000, mentally tell yourself it's $6,000. If it ends up being $6,500, you'll feel like you won.
- Consider your 401(k). If you don't need the cash for immediate expenses, diverting the bonus to a pre-tax retirement account is the single most effective way to "beat" the withholding.
The California tax on bonuses is steep, but it isn't always the final word on what you owe. It’s just the price of doing business in a state with some of the most complex tax codes in the world. Plan for the withholding, wait for the refund, and keep your receipts.