How Are Bonuses Taxed? Understanding Bonus Tax Rate in 2025

Receiving a bonus in the United States feels fantastic—until you see how much of it disappears due to taxes. Whether it’s a holiday reward, a performance incentive, or a signing bonus, the IRS treats most bonuses as taxable income. But how exactly are bonuses taxed in the USA, and is there a way to keep more of your bonus paycheck?

This guide breaks down how the bonus tax rate works in 2025 for U.S. employees, including federal rules, withholding methods, and smart strategies to minimize taxes.

Key Takeaways

• The federal bonus tax withholding rate is typically 22%.
• Employers might combine a bonus with your regular wages, resulting in a different withholding amount.
• There are strategies to potentially reduce the tax impact on your bonus.

What Is a Bonus?

A bonus is a financial reward given by employers to employees, typically for outstanding performance, meeting goals, or as an incentive to stay with the company. Bonuses can take many forms, including:

• Annual performance bonuses
• Holiday bonuses
• Signing bonuses
• Referral bonuses

Regardless of the type, bonuses are considered supplemental income by the IRS and taxed accordingly.

Are Bonuses Taxable?

Yes, bonuses are taxable income in the United States. They are subject to federal income taxes, Social Security and Medicare taxes (FICA), and possibly state income taxes, depending on where you live.

How Are Bonuses Taxed?

Bonuses in the USA are taxed as supplemental wages, and employers generally use one of two IRS-approved methods to withhold taxes. Understanding which method your employer uses is important because it can affect how much money you actually take home. Here's how it works in more detail:

Employers typically use one of two methods to calculate the tax on bonuses:

1. The Percentage Method

Under this method, the IRS requires employers to withhold a flat rate of 22% from your bonus, regardless of your normal income tax bracket. This method is often used when the bonus is issued separately from your regular paycheck. It provides predictability and simplicity in calculating tax withholding.

• Example: If you receive a $5,000 bonus, your employer will withhold $1,100 for federal taxes before you even see the check.
• Important to know: While 22% is withheld initially, your final tax liability will be calculated when you file your annual tax return. Depending on your overall income, you might owe additional taxes or receive a refund.

The IRS sets a flat withholding rate for supplemental wages. In 2025, the bonus tax withholding rate is 22%.

• Example: If you receive a $5,000 bonus, $1,100 is withheld for federal taxes.

This method usually applies when the bonus is issued separately from your regular paycheck.

2. The Aggregate Method

If your employer combines your bonus with your regular paycheck, they will calculate withholding based on your total earnings as if it were a normal paycheck. This method can sometimes result in a higher withholding rate, especially if the bonus amount pushes you into a higher tax bracket temporarily.

• Example: If your normal paycheck is $2,000 and you receive a $3,000 bonus added on top, your employer calculates tax based on $5,000 total.
• Important to know: This approach can lead to temporary "bracket creep," causing more taxes to be withheld upfront. However, your actual tax rate is based on your total annual income, so you could recover some of the excess withholding at tax time.

If your employer combines your bonus with your regular paycheck, your total earnings are taxed based on your W-4 form and regular withholding rate. This could result in higher withholding if your combined income pushes you into a higher bracket temporarily.

• Example: A $3,000 bonus added to a paycheck could temporarily push you into a higher withholding rate.

Other Taxes That Apply to Bonuses

Besides federal income tax, bonuses in the USA are also subject to:

• FICA Taxes: 6.2% for Social Security and 1.45% for Medicare
• Additional Medicare Tax: 0.9% on wages exceeding $200,000 (single) or $250,000 (married filing jointly)
• State Income Tax: Rates vary by state

These deductions can significantly reduce your bonus payout.

Can You Reduce the Tax on Your Bonus?

While you can't avoid paying taxes altogether, there are a few strategies to minimize the impact:

1. Contribute to Pre-Tax Accounts: Boost your 401(k), 403(b), or HSA contributions to lower your taxable income.
2. Adjust Your Withholding: Update your W-4 temporarily to accommodate your bonus.
3. Request Timing Adjustments: Ask your employer to defer the bonus to a different tax year if it helps lower your taxable income.

Consult a tax advisor before making decisions, especially if your bonus is significant.

Bonus Tax Rate in 2025 Summary

Tax TypeRateFederal Withholding22% (Percentage Method)Social Security (FICA)6.2%Medicare (FICA)1.45%Additional Medicare Tax0.9% (if applicable)State Income TaxVaries by state

FAQs: Tax on Bonuses

Is my bonus taxed differently than my regular paycheck?

Yes. Bonuses are considered "supplemental income" and may be taxed at a flat 22% federal withholding rate or combined with your regular wages under your normal tax rate.

Why is so much tax taken out of my bonus?

The IRS requires a flat withholding rate on supplemental wages like bonuses. Additionally, Social Security, Medicare, and state taxes also apply.

Will I get some of the bonus tax back when I file my taxes?

Potentially. If too much was withheld, you could get a refund when you file your tax return.

Can I ask my employer to withhold less on my bonus?

Employers must follow IRS guidelines, so you can't directly lower withholding on a bonus. However, you can adjust your W-4 or use pre-tax contributions to manage your tax burden.

Does the bonus push me into a higher tax bracket permanently?

Not necessarily. A bonus could temporarily increase your withholding, but it doesn't change your actual annual tax bracket unless your total income for the year exceeds thresholds.

Final Thoughts

While it can feel frustrating to see a large portion of your bonus go to taxes, understanding how the bonus tax rate works in the USA empowers you to make better financial decisions. Smart strategies like contributing to pre-tax accounts and adjusting withholdings can help reduce the impact.

If you're looking to grow your financial future beyond your bonus, check out How to Make My Money Work for Me for proven strategies to maximize your earnings and build wealth.