You just crushed your quarterly goals. Your boss calls you into the office, offers a firm handshake, and hands you a piece of paper that says you’re getting a $5,000 bonus. You’re already spending it in your head. Maybe a new couch? A weekend in Vegas? But then the direct deposit hits and it’s… significantly less than $5,000. It feels like a gut punch. You start wondering if the payroll department made a massive mistake or if the IRS just personally hates you.
The truth is, understanding what percent are bonuses taxed is one of the most confusing parts of the American tax code. Most people think they’re getting "taxed" at a much higher rate than their normal salary. It certainly looks that way when you see 22% or more vanish instantly. But there is a massive difference between what is "withheld" and what you actually "owe" at the end of the year.
Why Your Bonus Check Looks So Small
The IRS doesn't actually see your bonus as a "gift." They see it as "supplemental wages." That’s a fancy term for any money you get from your employer that isn't your regular hourly wage or salary. This includes commissions, overtime, prizes, and—of course—bonuses. Because this money is extra, the IRS has different rules for how your employer has to take the taxes out upfront.
Most companies use the percentage method. It's the simplest way for them to handle it. For 2026, the flat withholding rate for supplemental wages under $1 million is 22%.
Think about that for a second. If you’re normally in the 12% tax bracket, seeing 22% disappear feels like robbery. It’s a huge jump. However, if you’re a high earner in the 35% bracket, that 22% withholding is actually too low, and you might end up owing more money when you file your returns in April. It’s a weird, inconsistent system that catches almost everyone off guard the first time they get a "big" check.
The Million Dollar Rule
If you are lucky enough to receive a bonus over $1 million, the rules change drastically. The IRS stops playing around at that level. Any supplemental wages exceeding $1 million are taxed at a flat 37%. This is the highest individual tax rate in the country. There’s no way around it, no clever accounting for the employer, just a straight-up cut for the government.
The Two Methods Companies Use to Calculate Withholding
Your HR department isn't just picking numbers out of a hat. They generally stick to one of two paths.
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The Percentage Method
This is the one we just talked about. Your employer identifies the bonus as a separate payment from your regular salary. They apply the flat 22% federal withholding rate. Simple. Done. But keep in mind, this 22% only covers federal income tax. You still have to pay Social Security (6.2%), Medicare (1.45%), and whatever your state wants to take. In states like California or New York, your "22% tax" can easily feel like 40% once everyone else gets their hands in your pocket.
The Aggregate Method
This is where things get messy and expensive. If your employer adds your bonus to your regular paycheck and treats it as one big lump sum, they use the aggregate method. Basically, the payroll software looks at that one giant check and assumes you make that much every single pay period.
Let’s say you normally make $5,000 a month, but this month you got a $10,000 bonus. The system sees a $15,000 check and thinks, "Holy cow, this person makes $180,000 a year!" It then withholds taxes at the much higher rate associated with a $180k salary. This is why people often scream that their bonus was "taxed at 50%." It wasn't actually taxed that high; it was withheld that high. You’ll likely get a big chunk of that back as a refund, but that doesn't help you pay your bills today.
What Percent Are Bonuses Taxed at the State Level?
You can't forget the state. Unless you live in a place like Florida, Texas, or Washington (shoutout to no income tax states), you’re going to lose even more of that bonus.
States handle supplemental wages differently. Some follow the federal lead and have a flat "supplemental rate." Others just tell employers to withhold at the employee's normal tax rate.
- California: They have a specific supplemental withholding rate of 10.23% for most bonuses.
- New York: Often uses a flat rate around 9.62%.
- Illinois: Usually sticks to their flat income tax rate, currently around 4.95%.
If you live in a high-tax city like NYC, you might even have a local tax on top of that. It’s easy to see how a $10,000 bonus can turn into $5,500 in your bank account real quick. It's frustrating. It's honestly kind of depressing. But knowing it’s coming is better than being surprised.
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Can You Avoid the Bonus Tax Trap?
You can’t legally "avoid" the tax, but you can change the timing.
Some people try to adjust their W-4 right before the bonus hits. They'll increase their allowances or claim "exempt" for one pay period to keep the 22% from being taken out. This is risky. If you don't change it back immediately, or if you underpay your taxes for the year, the IRS can hit you with penalties. Plus, if your employer uses the flat 22% method, your W-4 might not even affect the bonus withholding anyway.
A better way? The 401(k) Shuffle.
If your company allows it, you can ask to have a huge percentage of your bonus deposited directly into your 401(k) or 403(b). Since these are "pre-tax" contributions, the money goes into your retirement account before the IRS can touch it.
- You don't pay federal income tax on that portion now.
- You don't pay state income tax on it.
- You still have to pay FICA (Social Security and Medicare).
- The money grows for your future.
It’s a win for your net worth, even if it’s a loss for your "fun money" today.
The Reality of the Tax Refund
Here is the most important thing to remember: Withholding is not the same as Tax Liability.
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At the end of the year, when you fill out your 1040, all your income is thrown into one big pot. Your salary, your bonuses, your side hustle, and your gambling winnings are all just "income." The IRS calculates how much total tax you owe based on your total income for the year.
If the 22% withheld from your bonus was too much (because you’re actually in the 12% bracket), you get that money back. It comes as part of your tax refund. If the 22% wasn't enough (because you’re in the 32% bracket), you’ll owe the difference. The "percent" your bonus is taxed is, in the end, exactly the same percent as your regular income. The only thing that changes is how much the government takes out of your check right now.
Common Misconceptions That Cost People Money
A lot of people think bonuses "push you into a higher tax bracket." This is a misunderstanding of how progressive tax brackets work. Only the money in the higher bracket is taxed at the higher rate. Getting a bonus will never result in you taking home less total money than if you hadn't received the bonus at all. That’s a total myth.
Another mistake is forgetting about the Social Security Wage Base. For 2026, the Social Security tax only applies to the first $170,000ish (the exact number adjusts for inflation) you earn. If your bonus happens late in the year and you’ve already earned over that amount, your bonus might actually have less withheld because the 6.2% Social Security tax is no longer being deducted.
Actionable Steps for Your Next Bonus
If you're expecting a bonus soon, don't just sit there and let the payroll software decide your fate. Take a few steps to protect your cash flow.
- Check with HR: Ask which method they use (Percentage or Aggregate). If they use Aggregate, prepare for a very small check and a bigger refund later.
- Calculate the State Hit: Look up your state’s supplemental tax rate so you aren't blindsided.
- Boost Your 401(k) Contribution: If you don't need the cash immediately, tell your payroll department to put 50% or more of the bonus into your retirement account. It's the most effective way to "save" the money from taxes.
- Adjust Your Withholding: If you know you'll be over-withheld because of a large bonus, you can slightly decrease the withholding on your regular checks for the rest of the year to balance it out. Just be careful not to underpay.
- Plan the Spend: Once you know the "net" amount (usually about 60-70% of the gross for most people), then you can decide where it goes.
Tax laws change, and 2026 might bring new tweaks to the brackets or the supplemental rates. Always double-check your specific situation with a tax professional if the numbers look weird. Understanding what percent are bonuses taxed isn't about being a math genius; it's about knowing that the number on the paper is rarely the number that ends up in your pocket.
Keep your records, watch your paystubs, and remember that even if the government takes a bite now, the final accounting happens in April. If you're smart about it, you can make sure that bonus works for you, not just for the IRS.
Manage your expectations by calculating your "Take-Home" percentage ahead of time. Assume you will lose about 30% to 40% to various taxes. If you end up with more, it's a pleasant surprise. If you end up with exactly that, you've already planned your budget around it. Knowledge is the only way to stop the "bonus day" letdown.